c.
Variable production overhead refers to the indirect
INVENTORIES refer to assets that are held for sale cost of production that varies directly with the
in the ordinary course of business, in the process of volume of
production for such production (e.g. indirect labor and indirect
sale or in the form of materials or supplies to be materials).It is allocated based on the actual use of
consumed in the production process or in the the production
rendering of services (PAS 2). facilities.
3. Other costs incurred in bringing the inventories to
Goods Includible in Inventories their present location and condition
As a rule, all goods to which the entity has title (legal
test) shall be included in the inventory, regardless of Cost of Inventories of a Service Provider - consists
location. Accordingly an entity may be considered of the labor and other costs of personnel directly
the legal owner of the goods even if the same are not engaged in the provision
yet physically held by the of the service, including supervisory personnel and
former. attributable overhead.
CONSIGNMENT – an agreement whereby the At the time of actual delivery:
owner of the goods, called the CONSIGNOR, a. The “Purchases” account is debited at the lower of
transfers physical possession of the committed price and the current price
goods to an agent, called the CONSIGNEE, who sells b. The “Accounts Payable” account is credited
them on behalf of the former. always at the committed price
c. Additional “Loss on Purchase Commitment” is to
Methods of Recording Credit Purchases be recognized if the current price at the time of
1. Gross Method – The accounts payable and delivery is lower
purchases accounts are recorded at the gross amount than the current price at year-end.
of the invoice (before d. “Gain on Purchase Commitment” shall be
deducting any offered cash discount) recognized if the current price at the time of delivery
2. Net Method – The accounts payable and purchases is higher than the
account are recorded at the net amount of the invoice current price at year-end. However, the amount of
(after deducting gain to be recognized should not exceed the losses
any offered cash discount). Any discount foregone previously
shall be recorded as “Purchase Discount Lost” and recognized
classified among
other expense items.
Types of Discounts
1. Trade discounts – are offered to encourage
transactions in high volume and/or to reward
customer patronage
2. Cash discounts – are offered to encourage prompt
collection/payment of accounts
COST OF INVENTORIES
1. Cost of purchase – comprises the purchase price,
import duties and irrecoverable taxes, freight,
handling and other costs
directly attributable to the acquisition of finished
goods, materials and services.
a. Trade discounts, rebates and other similar items
are deducted in determining the cost of purchase
b. Foreign exchange differences on inventory
transactions denominated in foreign currency are
excluded from
the cost of purchase
c. Financing costs (interest) related to the acquisition
of inventories on a deferred settlement basis is
excluded
from the cost of purchase and is recognized as
interest expense over the period of financing
2. Cost of conversion – includes costs that are
necessary in the conversion of materials into finished
products such as direct
labor and systematic allocation of fixed and variable
production overhead.
a. Direct labor pertains to the cost of labor of
workers and employees who have a direct
involvement in the
production of goods and/or services (e.g salary of
workers in the factory)
b. Fixed production overhead refers to the indirect
cost of production that remains relatively constant
regardless of
the volume of production (e.g. rent of factory
building). It is allocated based on the normal capacity
of the
production facilities.
NET REALIZABLE VALUE or NRV is the
estimated selling price in the ordinary course of
business less the estimated cost of completion and
the estimated cost of disposal of inventories.
Cost of Inventories shall be
determined by using either: [1] First in, First
out (FIFO) or [2] Weighted average.
Accounting for Inventory Writedown
1. Inventories are usually written down to NRV on
an item by item or individual basis.
2. A writedown is required if the NRV is lower
than the cost of the inventory.
Accordingly, the inventory is measured at NRV
and the decrease in value is
appropriately recognized.
3. No writedown is recorded if the NRV of the
inventory is greater than its cost.
Methods of Accounting for Inventory
Writedown
1. Direct Method or Cost of Sales Method
a. The Inventory is measured at the LCNRV
b. Any loss on writedown or gain on subsequent
reversal of the same is
buried in the Cost of Sales; no separate accounting
for the loss is made
2. Allowance Method or Loss Method
a. The Inventory is measured at COST
b. Any loss on writedown or gain on subsequent
reversal of the same is
accounted for separately.
c. A valuation account, “Allowance for Inventory
Writedown” is maintained
d. “Loss on Inventory Writedown” increases Cost
of Sales while “Gain on
Reversal of Inventory Writedown” decreases Cost
of Sales
e. The amount of gain on reversal of writedown
cannot exceed the
cumulative amount of losses on inventory
writedown previously recognized.
Accounting for Purchase Commitments
1. Purchase commitments are obligations of the
entity to acquire certain goods
sometime in the future at a fixed price and fixed
quantity.
2. No formal accounting entry is made upon
signing of the purchase commitment.
However, a note disclosure is required in the notes
to FS.
3. At year-end (FS preparation date), a Loss on
Purchase Commitment and an
Estimated Liability for Purchase Commitment are
recognized if the current price is
lower than the committed price. No entry is
recognized if it is otherwise.
4. At the time of actual delivery:
a. The “Purchases” account is debited at the lower
of the committed
price and the current price
b. The “Accounts Payable” account is credited
always at the
committed price
c. Additional “Loss on Purchase Commitment” is
to be recognized if the
current price at the time of delivery is lower than
the current price
at
year-end.
d. “Gain on Purchase Commitment” shall be
recognized if the current
price at the time of delivery is higher than the
current price at year
end. However, the amount of gain to be recognized
should not
exceed the losses previously recognized.
