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

Note. You should include details and a description of your workings and all figures should be calculated 

to the nearest $. 

ANSWER 

Calculation of overheads for inventory 

Production overheads are as follows. 

 

 $      

Depreciation/finance costs 

 4,490 

Factory manager's wage 

 2,560 

Other production overheads 

 24,820 

Accounting/purchase costs 

   5,450 

 

 37,320 

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CHAPTER 7  

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  INVENTORY 

 

127 

Direct labour = $61,320 

 Production overhead rate  = 

37,320

61,320

 = 60.86% 

Inventory valuation 

 

Raw 

 

Finished 

 

 

materials 

WIP 

goods 

Total 

 

   $      

   $      

   $      

   $      

 Materials 

 74,786 

 85,692 

 152,693 

 313,171 

 Direct labour  

– 

 

13,072 

 46,584 

 59,656 

 Production overhead 

 

 

 

 

    (at 60.86% of labour) 

          – 

     7,956 

   28,351 

   36,307 

 

 74,786 

 106,720 

 227,628 

 409,134 

Variable overheads will be included in the cost of inventory. 

 

5.6 Net realisable value (NRV) 

As a general rule, assets should not be carried at amounts greater than those expected to be realised 

from their sale or use. In the case of inventories this amount could fall below cost when items are 

damaged or become obsolete, or where the costs to completion have increased in order to make the 

sale. 

In fact, we can identify the principal situations in which NRV is likely to be less than cost.  

(a) An 

increase in costs or a fall in selling price 

(b) A 

physical deterioration in the condition of inventory 

(c) 

Obsolescence of products 

(d) 

A decision as part of the company's marketing strategy to manufacture and sell products at a loss 

(e) 

Errors in production or purchasing 

A write down of inventories would normally take place on an item by item basis, but similar or related 

items may be grouped together. This grouping together is acceptable for, say, items in the same product 

line, but it is not acceptable to write down inventories based on a whole classification (eg finished 

goods) or a whole business. 

 

The assessment of NRV should take place at the same time as estimates are made of selling price, using 

the most reliable information available. Fluctuations of price or cost should be taken into account if they 

relate directly to events after the reporting period, which confirm conditions existing at the end of the 

period.  

(IAS 2, para. 30) 

The reasons why inventory is held must also be taken into account. Some inventory, for example, may 

be held to satisfy a firm contract and its NRV will therefore be the contract price. Any additional 

inventory of the same type held at the period end will, in contrast, be assessed according to general 

sales prices when NRV is estimated.  

(IAS 2, para. 31)  

NRV must be reassessed at the end of each period and compared again with cost. If the NRV has risen 

for inventories held over the end of more than one period, then the previous write down must be 

reversed to the extent that the inventory is then valued at the lower of cost and the new NRV. This may 

be possible when selling prices have fallen in the past and then risen again.  

(IAS 2, para. 33) 

On occasion a write down to NRV may be of such size, incidence or nature that it must be disclosed 

separately. 

 EXAM FOCUS POINT 

The ACCA examining team's report covering the January to June 2016 exams discussed a question 

which required the candidates to value inventory of two products. This required candidates to compare 

the cost and NRV of each product rather than the total inventory. 

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