Cost of Inventory

Topics: Inventory, Cost, Costs Pages: 2 (754 words) Published: June 24, 2013
Case Study Inventory
The Cost of Inventory
The general principle for cost inclusion into inventory for US GAAP and IFRS is similar but not exactly the same. First let us look at US GAAP. The basis of accounting for inventories is “cost,” which is explained in ASC 330-10-30 paragraph 1 as “the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location.” These costs are divided into two different categories, the first is Acquisition Costs, and the second are Production Costs. We are then told that in determination of the final amounts for both acquisition costs and production costs, it involves many different considerations to come up with a final value.

Next, we have to look into the IFRS definition of which costs we can include in our inventory valuation. In AIS 2 paragraph 10, it states that an inventories cost can be based on three costs, not just two as we saw in US GAAP. The first cost is the Purchasing Costs, second is the Conversion Costs, and third is Other Costs that are used in bringing the inventories to their present location and condition.

The first similarity that comes to my attention is that both US GAAP and IFRS determine the cost of inventories by the costs that are incurred by an entity to get inventory from its original state it was purchased or acquired in to its present condition and location. The only difference is that US GAAP lists the costs in two categories (Acquisition costs and Production costs) and IFRS does so in three categories (Purchasing, Conversion, and Other costs). But overall, US GAAP and IFRS cost inclusion into inventories are very similar.

In US GAAP and IFRS, both variable and fixed production overhead costs are included as cost of inventories, but depend on the different considerations. Variable production overhead costs are recorded by the actual use of the company to each item of inventory, and fixed production overhead...
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