Question

An entity manufactures parts at its factory which it uses at a number of distribution centers. The following costs relate to the manufacture of the parts:

1. Fixed production overheads, apportioned on a reasonable basis

2. Costs of transporting the parts from the factory to the distribution centers

3. The costs of returning the transportation vehicles from the distribution centers to the factory

4.The ongoing costs of storing the parts at the distribution centers prior to their use.

Which of the above costs can be included in the cost of parts at the distribution centers under the principles of IAS 2?

A) 1 and 2

B) 2 and 4

C) 2 and 3

D) 1 and 4

Answer 1

Correct Answer is:

Option A) - 1 and 2

Items included in the cost of purchase:

The costs of conversion of inventories include costs directly related to the units of production.

direct labour, including all related employment taxes, and benefits and any share-based payment costs; and

a systematic allocation of the fixed and variable production overheads incurred in converting materials into finished goods.

Distribution costs included in the cost of inventories

Specific attention should be paid to costs of distribution and transportation associated with moving inventories to their present location and condition for sale, which may include the following:

transportation of goods from the supplier;

transportation or distribution at an intermediate stage in the production process;

transportation or distribution of inventories to a temporary storage location (e.g. warehouse), including costs incurred for receiving, marking, processing, picking and repackaging; and

transportation or distribution of inventories from a warehouse or distribution centre to the initial point of sale.

Costs incurred in transporting an item from a warehouse to its initial point of sale should be capitalised to inventories. However, costs associated with moving inventories from one point of sale to another (e.g. transport of goods between stores) should not be included in the cost of inventories because the goods were already in a condition and location for sale before the move.

Costs to be excluded from the cost of inventories:

As per IAS 2:  The following examples of costs should be excluded from the cost of inventories and recognised as expenses in the period in which they are incurred:

•abnormal amounts of wasted materials, labour, or other production costs;

•storage costs, unless those costs are necessary in the production process before a further production stage;

•administrative overheads that do not contribute to bringing inventories to their present location and condition; and

•selling costs.