Acca financial Accounting (FA) Study Text ac ca (FA)

Cost vs Fair value less further costs to sell (NRV) 

 

Example 

Gordano is a small furniture manufacturing entity. All of its timber is 

imported from Scandinavia and there are only three basic products - 

bookcases, dining tables and cupboards. The entity has 200 completed 

bookcases in inventory at the end of the year. For final accounts 

purposes, these will be stated at the lower of cost and net realisable 

value. How is 'cost' arrived at? 

Solution 

'Cost' will include several elements: 

•

 

Cost of purchase. First of all we must identify the timber used in the 

manufacture of bookcases (as opposed to dining tables and 

cupboards). The relevant costs will include the cost of the timber, 

the import duty and all the insurance and freight expenses 

associated with transporting the timber from Scandinavia to the 

factory. 

•

 

Cost of conversion. This will include costs which can be directly 

linked to the bookcases produced during the year. This includes 

labour costs ‘booked’ and sundry material costs (e.g. hinges and 

screws). Production overheads present particular problems. Costs 

such as factory heating and light, salaries of supervisors and 

depreciation of equipment are likely to relate to the three product 

ranges. These costs must be allocated to these product ranges on a 

reasonable basis.  

 

 

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