Question

A particular production process requires two types of raw materials to produce the end product. Each unit of finished product requires three units of raw material A and 2 units of raw material B, plus processing costs of $35. For the purpose of valuing inventory, raw material A and B are recorded together in one account and should be considered together when determining cost and net realizable value. The following provides information on inventories at fiscal 2019 year-end: Inventory item # units Cost per unit Replacement cost Net realizable value Finished goods 800 181 NA 161 Raw material A 150 10 17 NA Raw material B 110 58 53 NA Required: a. Evaluate these inventories to determine the amount of write-down, if any. b. If the entry required in part (a) is not made in fiscal 2019, state what is the effect on each of the following will be. For each you must state whether there will be no effect, the amount will be understated or overstated. If the amount is understated or overstated, you must include the amount of the under/over statement. i) 2019 and 2020 inventory on the balance sheet ii) 2019 and 2020 cost of goods sold

Answer 1

Knowledge required:

Inventory should be recorded at value lower of cost and net realisable value/replacement cost.

According to the same,

a.

Particulars	Units	Cost / unit	Replacement cost	Net realisable value	Value at which inventory should be reported	Changes required	Amount of change = (Value to be reported - Cost)* no. of units
Finished Goods	800	181	NA	161	161	Yes	-16000
Raw Material A	150	10	17	NA	10	No	0
Raw Material B	110	58	53	NA	53	Yes	-550

b.

If reporting amount is not chnaged in FY 2019 in case of finished goods and Raw Material B.

i) 2019 inventory will be overstated and 2020 inventory will be understated.

ii) COGS for 2019 will be understated and COGS for 2020 will be overstated.