Question

Case (a) Al Omar Corporation is a manufacturer of food and beverages in Oman. The following information was relevant to the inventories of the business. For the last 5 years the corporation was adopting standard costing method for valuing its inventory. The variances of standard cost were insignificant to date and the corporation usually written off those variances in the published financial statements. By doing this process, the corporation has encountered the following problems:

 The corporation has found out that the material cost and labor cost were increasing when the standard cost variances are far greater.

 The products were produced according to the market survey of demand and consumption but the ultimate result was just opposite. According to survey there were large number of products produced but at the end of the year large number of finished products were kept in a factory stores as unsold. This situation was partially attributable to the corporation being considered overpriced. The management of the corporation decided to write off these variances directly as term costs and the cost of the part of the unsold finished products were also written off.

Case (b) The raw materials of confectioneries on hand represents eight months of usage. But two months of usage only represented to the inventory levels. The initial cost is more than the replacement cost of the value of inventories.

Required: By considering the above situation mentioned in Case (a) and Case (b), on the role of an accountant how would you treat the scenario as per the requirements of IAS 2?

Answer 1

Answer is given below

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Case (a) Both treatments in above situation are unacceptable

· Writing off the amount of large variances by the method of standard costing is not approximating cost as per IAS 2 having paragraph 4.3.4. The Standard Costs are that costs which are to be reviewed regularly and to be revised in forecasting the current situation. The material and labor variances must be allocated to the Inventories’ Standard Costs.

· The corporation considered the inventory as “overpriced” which is arbitrary. If Net Realizable values is lower than its cost, only then written down of value should be done.

Case (b)

Raw material should be written off to Net Realizable Value (NRV) which represents six months of usage which is the abnormal portion of raw material. The remaining raw materials on hand i.e., 2 months of usage should only be written off to its NRV if the estimated cost of the finished products will be greater than NRV.