I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART D: RECORDING TRANSACTIONS AND EVENTS 

 

118

 

However, for a company with large amounts of inventory, this procedure may be impracticable. In this 

case it is acceptable to group similar items into categories and perform the comparison of cost and NRV 

category by category, rather than item by item. 

QUESTION 

Valuation

 

The following figures relate to inventory held at the year end. 

 

A  

B  

C  

 

$  

$  

$  

Cost 20 

9 

12 

Selling price 

30 

12 

22 

Modification cost to enable sale 

– 

2 

8 

Marketing costs 

7 

2 

2 

Units held 

200 

150 

300 

Required 

Calculate the value of inventory held. 

ANSWER 

Item 

Cost 

NRV 

Valuation 

Quantity 

Total value 

 

 

$ 

 

$ 

 

$ 

 

Units 

 

$     

 

A 

 

20 

 

23 

 

20 

 

200 

 

4,000 

 

B 

 

9 

 

8 

 

8 

 

150 

 

1,200 

 

C 

 

12 

 

12 

 

12 

 

300 

 

3,600 

 

 

 

 

 

 

8,800 

 

So have we now solved the problem of how a business should value its inventories? It seems that all the 

business has to do is choose the lower of cost and NRV. This is true as far as it goes, but there is one 

further problem, perhaps not so easy to foresee: for a given type of inventory, what was the cost? 

4.3 Determining the purchase cost 

Inventories may be raw materials or components bought from suppliers, finished goods which have 

been made by the business but not yet sold, or work in the process of production, but only 

part-completed (this type of inventory is called work in progress or WIP). It will simplify matters, 

however, if we think about the historical cost of purchased raw materials and components, which ought 

to be their purchase price. 

A business may be continually purchasing consignments of a particular component. As each 

consignment is received from suppliers the components are stored in the appropriate bin or on the 

appropriate shelf or pallet, where they will be mingled with previous consignments. When the 

storekeeper issues components to production they will simply pull out from the bin the nearest 

components to hand, which may have arrived in the latest consignment, in an earlier consignment or in 

several different consignments. Our concern is to devise a pricing technique, which we can use to 

attribute a cost to each of the components issued from stores. 

There are several techniques which are used in practice. 

