Costs of purchase and production cost of inventories

• Item or batch measured (description, quantities, purchased or produced)

  TextRequired

• Purchase price

  Number

  115,000

  For deferred settlement terms, enter the price for normal credit terms: the difference with the amount paid is interest expense (para. 18). Leave blank for an item produced without a specific purchase.

• Import duties

  Number

  4,600

• Other taxes not subsequently recoverable from the taxing authorities

  Number

• Transport, handling and other costs directly attributable to the acquisition

  Number

  2,150

• Trade discounts

  Number

  5,750

• Rebates and other similar items

  Number

• Recoverable tax invoiced (outside cost)

  Number

  23,200

• Materials drawn from inventory for production (at their cost)

  Number

• Direct labour

  Number

• Variable production overheads (based on actual use)

  Number

• Fixed production overheads for the period

  Number

• Normal capacity retained (units)

  Number

  Average production expected over a number of periods or seasons under normal circumstances, taking into account planned maintenance; the actual level may be used if it approximates normal capacity (para. 13). The figure is a documented estimate of the entity, never set by the standard.

• Actual production for the period (units)

  Number

• Other costs incurred in bringing the inventories to their present location and condition

  Number

• Costs examined and treatment considered (storage, waste, administrative overheads, selling, financing)

  TextRequired

• Amount paid under the deferred settlement terms

  Number

• Price for normal credit terms

  Number

• Evidence obtained and referenced (category, document reference)

  EvidenceRequired

IAS 2 §10IAS 2 §11

• Components of the costs of purchase

  ChecklistRequired

  • Cost of inventories: costs of purchase, costs of conversion and other costs of bringing them to their present location and condition
  • Purchase price, import duties and non-recoverable taxes included
  • Taxes subsequently recoverable excluded from cost
  • Transport, handling and other directly attributable costs included
  • Trade discounts, rebates and similar items deducted

IAS 2 §12IAS 2 §13

• Components of the costs of conversion

  Checklist

  • Costs directly related to the units of production (such as direct labour)
  • Systematic allocation of fixed and variable production overheads
  • Fixed overheads allocated on the basis of the normal capacity of the production facilities
  • Low production: fixed amount per unit not increased, unallocated overheads expensed in the period
  • Abnormally high production: fixed amount per unit reduced so that inventories are not measured above cost
  • Variable overheads allocated on the basis of the actual use of the production facilities

IAS 2IAS 2 §16IAS 2IAS 2 §18

• Treatment of other costs

  ChecklistRequired

  • Other costs included only to the extent they bring the inventories to their present location and condition
  • Abnormal amounts of wasted materials, labour or other production costs excluded
  • Storage costs excluded, unless 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 excluded
  • Selling costs excluded
  • Borrowing costs included only in the limited circumstances identified in IAS 23
  • Deferred settlement terms containing a financing element: difference recognised as interest expense over the period of the financing

IAS 2 §10IAS 2 §11IAS 2 §12IAS 2 §13IAS 2 §18

• Costs of purchase

  CalculationRequired

  116,000

  Purchase price ; Import duties ; Other taxes not subsequently recoverable from the taxing authorities ; Transport, handling and other costs directly attributable to the acquisition ; − Trade discounts ; − Rebates and other similar items

• Allocation basis of fixed overheads (higher of normal capacity and actual production, in units)

  Calculation

  Normal capacity retained (units) ; Actual production for the period (units)

  Using the higher of the two levels reflects paragraph 13: with low production, the amount per unit stays at the normal capacity level; with abnormally high production, it is reduced. If the entity uses an actual level that approximates but is below normal capacity, enter that actual level as the normal capacity retained.

• Fixed overheads allocated (fixed overheads × actual production / allocation basis)

  Calculation

  Fixed production overheads for the period ; Allocation basis of fixed overheads (higher of normal capacity and actual production, in units) ; Actual production for the period (units)

• Unallocated fixed overheads, recognised as an expense in the period

  Calculation

  0

  Fixed production overheads for the period ; − Fixed overheads allocated (fixed overheads × actual production / allocation basis)

• Production costs included (materials drawn, direct labour, variable overheads, fixed overheads allocated)

  Calculation

  0

  Materials drawn from inventory for production (at their cost) ; Direct labour ; Variable production overheads (based on actual use) ; Fixed overheads allocated (fixed overheads × actual production / allocation basis)

  Each cost is entered only once: materials bought for the batch are in the costs of purchase, materials drawn from existing inventory are entered here at their cost.

• Cost of inventories (purchase + production + other costs included)

  CalculationRequired

  116,000

  Costs of purchase ; Production costs included (materials drawn, direct labour, variable overheads, fixed overheads allocated) ; Other costs incurred in bringing the inventories to their present location and condition

• Financing element (amount paid − price for normal credit terms)

  Calculation

  0

  Amount paid under the deferred settlement terms ; − Price for normal credit terms

• Purchase recorded in inventories

  EntryRequired

  Account	Debit	Credit
  Inventories	116,000
  Recoverable tax	23,200
  Payables (costs of purchase)		116,000
  Payables (recoverable tax)		23,200

  Teaching assumption: all the costs of purchase are owed to suppliers; adapt the credit side if a cost is settled otherwise.

• Production costs included in inventories and unallocated fixed overheads

  EntryRequired

  Debit Inventories (production costs included) ← Production costs included (materials drawn, direct labour, variable overheads, fixed overheads allocated) ; Debit Inventories (other costs included) ← Other costs incurred in bringing the inventories to their present location and condition ; Debit Unallocated fixed overheads expense ← Unallocated fixed overheads, recognised as an expense in the period ; Credit Production costs by nature (transferred) ← Production costs included (materials drawn, direct labour, variable overheads, fixed overheads allocated) ; Credit Costs by nature (other costs transferred) ← Other costs incurred in bringing the inventories to their present location and condition ; Credit Production costs by nature (unallocated fixed overheads) ← Unallocated fixed overheads, recognised as an expense in the period

  Teaching assumption: the costs of the period are first recorded by nature, then transferred to inventories for the part included; the unallocated fixed part remains an expense (para. 13).

• Interest expense on deferred settlement

  EntryRequired

  Debit Interest expense ← Financing element (amount paid − price for normal credit terms) ; Credit Payables ← Financing element (amount paid − price for normal credit terms)

  Total amount of the financing element; it is recognised as interest expense over the period of the financing (para. 18). The entry carries the total amount: it is appropriate only if the financing falls within the period; otherwise, use the share of the period.

IAS 2 §13IAS 2IAS 2 §16IAS 2IAS 2 §18

• Activity level of the period and allocation of fixed overheads

  JudgmentRequired

  Not applicable: purchased item, no fixed production overheads

  Production below normal capacity: allocation on normal capacity, unallocated overheads expensed / Actual production approximates normal capacity: actual level used / Abnormally high production: allocation on actual production, amount per unit reduced / Not applicable: purchased item, no fixed production overheads

• Rationale: facts relied on, analysis, alternative rejected

  TextRequired

• Treatment of the costs examined

  JudgmentRequired

  Partly included, the remainder expensed

  Included in the cost of inventories / Recognised as an expense in the period / Partly included, the remainder expensed

• Rationale: facts relied on, analysis, alternative rejected

  TextRequired

• Impact by caption, derived from the entries above (the Notes line refers to the disclosures)

  TableRequired

• Paragraphs cited in this workpaper (verification status shown from the register)

  References

• The activity level retained is documentedPass
• The treatment of the costs examined is documentedPass
• The fixed overheads are fully split between inventories and expenseNot evaluated
• The cost of inventories is determinedPass
• The purchase entry is balancedPass
• The production entry is balancedNot evaluated
• The interest entry is balancedNot evaluated

Assets

139,200

Liabilities

139,200

Profit or loss

0

OCI

0

Equity

0

• Item or batch measured (description, quantities, purchased or produced)

  TextRequired

• Purchase price

  Number

  For deferred settlement terms, enter the price for normal credit terms: the difference with the amount paid is interest expense (para. 18). Leave blank for an item produced without a specific purchase.

• Import duties

  Number

• Other taxes not subsequently recoverable from the taxing authorities

  Number

• Transport, handling and other costs directly attributable to the acquisition

  Number

• Trade discounts

  Number

• Rebates and other similar items

  Number

• Recoverable tax invoiced (outside cost)

  Number

• Materials drawn from inventory for production (at their cost)

  Number

  600,000

• Direct labour

  Number

  320,000

• Variable production overheads (based on actual use)

  Number

  80,000

• Fixed production overheads for the period

  Number

  500,000

• Normal capacity retained (units)

  Number

  50,000 units

  Average production expected over a number of periods or seasons under normal circumstances, taking into account planned maintenance; the actual level may be used if it approximates normal capacity (para. 13). The figure is a documented estimate of the entity, never set by the standard.

• Actual production for the period (units)

  Number

  40,000 units

• Other costs incurred in bringing the inventories to their present location and condition

  Number

  20,000

• Costs examined and treatment considered (storage, waste, administrative overheads, selling, financing)

  TextRequired

• Amount paid under the deferred settlement terms

  Number

  206,000

• Price for normal credit terms

  Number

  200,000

• Evidence obtained and referenced (category, document reference)

  EvidenceRequired

IAS 2 §10IAS 2 §11

• Components of the costs of purchase

  ChecklistRequired

  • Cost of inventories: costs of purchase, costs of conversion and other costs of bringing them to their present location and condition
  • Purchase price, import duties and non-recoverable taxes included
  • Taxes subsequently recoverable excluded from cost
  • Transport, handling and other directly attributable costs included
  • Trade discounts, rebates and similar items deducted

IAS 2 §12IAS 2 §13

• Components of the costs of conversion

  Checklist

  • Costs directly related to the units of production (such as direct labour)
  • Systematic allocation of fixed and variable production overheads
  • Fixed overheads allocated on the basis of the normal capacity of the production facilities
  • Low production: fixed amount per unit not increased, unallocated overheads expensed in the period
  • Abnormally high production: fixed amount per unit reduced so that inventories are not measured above cost
  • Variable overheads allocated on the basis of the actual use of the production facilities

IAS 2IAS 2 §16IAS 2IAS 2 §18

• Treatment of other costs

  ChecklistRequired

  • Other costs included only to the extent they bring the inventories to their present location and condition
  • Abnormal amounts of wasted materials, labour or other production costs excluded
  • Storage costs excluded, unless 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 excluded
  • Selling costs excluded
  • Borrowing costs included only in the limited circumstances identified in IAS 23
  • Deferred settlement terms containing a financing element: difference recognised as interest expense over the period of the financing

IAS 2 §10IAS 2 §11IAS 2 §12IAS 2 §13IAS 2 §18

• Costs of purchase

  CalculationRequired

  0

  Purchase price ; Import duties ; Other taxes not subsequently recoverable from the taxing authorities ; Transport, handling and other costs directly attributable to the acquisition ; − Trade discounts ; − Rebates and other similar items

• Allocation basis of fixed overheads (higher of normal capacity and actual production, in units)

  Calculation

  50,000 units

  Normal capacity retained (units) ; Actual production for the period (units)

  Using the higher of the two levels reflects paragraph 13: with low production, the amount per unit stays at the normal capacity level; with abnormally high production, it is reduced. If the entity uses an actual level that approximates but is below normal capacity, enter that actual level as the normal capacity retained.

• Fixed overheads allocated (fixed overheads × actual production / allocation basis)

  Calculation

  400,000

  Fixed production overheads for the period ; Allocation basis of fixed overheads (higher of normal capacity and actual production, in units) ; Actual production for the period (units)

• Unallocated fixed overheads, recognised as an expense in the period

  Calculation

  100,000

  Fixed production overheads for the period ; − Fixed overheads allocated (fixed overheads × actual production / allocation basis)

• Production costs included (materials drawn, direct labour, variable overheads, fixed overheads allocated)

  Calculation

  1,400,000

  Materials drawn from inventory for production (at their cost) ; Direct labour ; Variable production overheads (based on actual use) ; Fixed overheads allocated (fixed overheads × actual production / allocation basis)

  Each cost is entered only once: materials bought for the batch are in the costs of purchase, materials drawn from existing inventory are entered here at their cost.

• Cost of inventories (purchase + production + other costs included)

  CalculationRequired

  1,420,000

  Costs of purchase ; Production costs included (materials drawn, direct labour, variable overheads, fixed overheads allocated) ; Other costs incurred in bringing the inventories to their present location and condition

• Financing element (amount paid − price for normal credit terms)

  Calculation

  6,000

  Amount paid under the deferred settlement terms ; − Price for normal credit terms

• Purchase recorded in inventories

  EntryRequired

  Debit Inventories ← Costs of purchase ; Debit Recoverable tax ← Recoverable tax invoiced (outside cost) ; Credit Payables (costs of purchase) ← Costs of purchase ; Credit Payables (recoverable tax) ← Recoverable tax invoiced (outside cost)

  Teaching assumption: all the costs of purchase are owed to suppliers; adapt the credit side if a cost is settled otherwise.

• Production costs included in inventories and unallocated fixed overheads

  EntryRequired

  Account	Debit	Credit
  Inventories (production costs included)	1,400,000
  Inventories (other costs included)	20,000
  Unallocated fixed overheads expense	100,000
  Production costs by nature (transferred)		1,400,000
  Costs by nature (other costs transferred)		20,000
  Production costs by nature (unallocated fixed overheads)		100,000

  Teaching assumption: the costs of the period are first recorded by nature, then transferred to inventories for the part included; the unallocated fixed part remains an expense (para. 13).

• Interest expense on deferred settlement

  EntryRequired

  Account	Debit	Credit
  Interest expense	6,000
  Payables		6,000

  Total amount of the financing element; it is recognised as interest expense over the period of the financing (para. 18). The entry carries the total amount: it is appropriate only if the financing falls within the period; otherwise, use the share of the period.

IAS 2 §13IAS 2IAS 2 §16IAS 2IAS 2 §18

• Activity level of the period and allocation of fixed overheads

  JudgmentRequired

  Production below normal capacity: allocation on normal capacity, unallocated overheads expensed

  Production below normal capacity: allocation on normal capacity, unallocated overheads expensed / Actual production approximates normal capacity: actual level used / Abnormally high production: allocation on actual production, amount per unit reduced / Not applicable: purchased item, no fixed production overheads

• Rationale: facts relied on, analysis, alternative rejected

  TextRequired

• Treatment of the costs examined

  JudgmentRequired

  Partly included, the remainder expensed

  Included in the cost of inventories / Recognised as an expense in the period / Partly included, the remainder expensed

• Rationale: facts relied on, analysis, alternative rejected

  TextRequired

• Impact by caption, derived from the entries above (the Notes line refers to the disclosures)

  TableRequired

• Paragraphs cited in this workpaper (verification status shown from the register)

  References

• The activity level retained is documentedPass
• The treatment of the costs examined is documentedPass
• The fixed overheads are fully split between inventories and expensePass
• The cost of inventories is determinedPass
• The purchase entry is balancedNot evaluated
• The production entry is balancedPass
• The interest entry is balancedPass

Assets

1,420,000

Liabilities

6,000

Profit or loss

1,414,000

OCI

0

Equity

1,414,000

• Item or batch measured (description, quantities, purchased or produced)

  TextRequired

• Purchase price

  Number

  184,000

  For deferred settlement terms, enter the price for normal credit terms: the difference with the amount paid is interest expense (para. 18). Leave blank for an item produced without a specific purchase.

• Import duties

  Number

  11,040

• Other taxes not subsequently recoverable from the taxing authorities

  Number

• Transport, handling and other costs directly attributable to the acquisition

  Number

  6,160

• Trade discounts

  Number

  9,200

• Rebates and other similar items

  Number

• Recoverable tax invoiced (outside cost)

  Number

  38,400

• Materials drawn from inventory for production (at their cost)

  Number

• Direct labour

  Number

• Variable production overheads (based on actual use)

  Number

• Fixed production overheads for the period

  Number

• Normal capacity retained (units)

  Number

  Average production expected over a number of periods or seasons under normal circumstances, taking into account planned maintenance; the actual level may be used if it approximates normal capacity (para. 13). The figure is a documented estimate of the entity, never set by the standard.

• Actual production for the period (units)

  Number

• Other costs incurred in bringing the inventories to their present location and condition

  Number

• Costs examined and treatment considered (storage, waste, administrative overheads, selling, financing)

  TextRequired

• Amount paid under the deferred settlement terms

  Number

• Price for normal credit terms

  Number

• Evidence obtained and referenced (category, document reference)

  EvidenceRequired

IAS 2 §10IAS 2 §11

• Components of the costs of purchase

  ChecklistRequired

  • Cost of inventories: costs of purchase, costs of conversion and other costs of bringing them to their present location and condition
  • Purchase price, import duties and non-recoverable taxes included
  • Taxes subsequently recoverable excluded from cost
  • Transport, handling and other directly attributable costs included
  • Trade discounts, rebates and similar items deducted

IAS 2 §12IAS 2 §13

• Components of the costs of conversion

  Checklist

  • Costs directly related to the units of production (such as direct labour)
  • Systematic allocation of fixed and variable production overheads
  • Fixed overheads allocated on the basis of the normal capacity of the production facilities
  • Low production: fixed amount per unit not increased, unallocated overheads expensed in the period
  • Abnormally high production: fixed amount per unit reduced so that inventories are not measured above cost
  • Variable overheads allocated on the basis of the actual use of the production facilities

IAS 2IAS 2 §16IAS 2IAS 2 §18

• Treatment of other costs

  ChecklistRequired

  • Other costs included only to the extent they bring the inventories to their present location and condition
  • Abnormal amounts of wasted materials, labour or other production costs excluded
  • Storage costs excluded, unless 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 excluded
  • Selling costs excluded
  • Borrowing costs included only in the limited circumstances identified in IAS 23
  • Deferred settlement terms containing a financing element: difference recognised as interest expense over the period of the financing

IAS 2 §10IAS 2 §11IAS 2 §12IAS 2 §13IAS 2 §18

• Costs of purchase

  CalculationRequired

  192,000

  Purchase price ; Import duties ; Other taxes not subsequently recoverable from the taxing authorities ; Transport, handling and other costs directly attributable to the acquisition ; − Trade discounts ; − Rebates and other similar items

• Allocation basis of fixed overheads (higher of normal capacity and actual production, in units)

  Calculation

  Normal capacity retained (units) ; Actual production for the period (units)

  Using the higher of the two levels reflects paragraph 13: with low production, the amount per unit stays at the normal capacity level; with abnormally high production, it is reduced. If the entity uses an actual level that approximates but is below normal capacity, enter that actual level as the normal capacity retained.

• Fixed overheads allocated (fixed overheads × actual production / allocation basis)

  Calculation

  Fixed production overheads for the period ; Allocation basis of fixed overheads (higher of normal capacity and actual production, in units) ; Actual production for the period (units)

• Unallocated fixed overheads, recognised as an expense in the period

  Calculation

  0

  Fixed production overheads for the period ; − Fixed overheads allocated (fixed overheads × actual production / allocation basis)

• Production costs included (materials drawn, direct labour, variable overheads, fixed overheads allocated)

  Calculation

  0

  Materials drawn from inventory for production (at their cost) ; Direct labour ; Variable production overheads (based on actual use) ; Fixed overheads allocated (fixed overheads × actual production / allocation basis)

  Each cost is entered only once: materials bought for the batch are in the costs of purchase, materials drawn from existing inventory are entered here at their cost.

• Cost of inventories (purchase + production + other costs included)

  CalculationRequired

  192,000

  Costs of purchase ; Production costs included (materials drawn, direct labour, variable overheads, fixed overheads allocated) ; Other costs incurred in bringing the inventories to their present location and condition

• Financing element (amount paid − price for normal credit terms)

  Calculation

  0

  Amount paid under the deferred settlement terms ; − Price for normal credit terms

• Purchase recorded in inventories

  EntryRequired

  Account	Debit	Credit
  Inventories	192,000
  Recoverable tax	38,400
  Payables (costs of purchase)		192,000
  Payables (recoverable tax)		38,400

  Teaching assumption: all the costs of purchase are owed to suppliers; adapt the credit side if a cost is settled otherwise.

• Production costs included in inventories and unallocated fixed overheads

  EntryRequired

  Debit Inventories (production costs included) ← Production costs included (materials drawn, direct labour, variable overheads, fixed overheads allocated) ; Debit Inventories (other costs included) ← Other costs incurred in bringing the inventories to their present location and condition ; Debit Unallocated fixed overheads expense ← Unallocated fixed overheads, recognised as an expense in the period ; Credit Production costs by nature (transferred) ← Production costs included (materials drawn, direct labour, variable overheads, fixed overheads allocated) ; Credit Costs by nature (other costs transferred) ← Other costs incurred in bringing the inventories to their present location and condition ; Credit Production costs by nature (unallocated fixed overheads) ← Unallocated fixed overheads, recognised as an expense in the period

  Teaching assumption: the costs of the period are first recorded by nature, then transferred to inventories for the part included; the unallocated fixed part remains an expense (para. 13).

• Interest expense on deferred settlement

  EntryRequired

  Debit Interest expense ← Financing element (amount paid − price for normal credit terms) ; Credit Payables ← Financing element (amount paid − price for normal credit terms)

  Total amount of the financing element; it is recognised as interest expense over the period of the financing (para. 18). The entry carries the total amount: it is appropriate only if the financing falls within the period; otherwise, use the share of the period.

IAS 2 §13IAS 2IAS 2 §16IAS 2IAS 2 §18

• Activity level of the period and allocation of fixed overheads

  JudgmentRequired

  Not applicable: purchased item, no fixed production overheads

  Production below normal capacity: allocation on normal capacity, unallocated overheads expensed / Actual production approximates normal capacity: actual level used / Abnormally high production: allocation on actual production, amount per unit reduced / Not applicable: purchased item, no fixed production overheads

• Rationale: facts relied on, analysis, alternative rejected

  TextRequired

• Treatment of the costs examined

  JudgmentRequired

  Partly included, the remainder expensed

  Included in the cost of inventories / Recognised as an expense in the period / Partly included, the remainder expensed

• Rationale: facts relied on, analysis, alternative rejected

  TextRequired

• Impact by caption, derived from the entries above (the Notes line refers to the disclosures)

  TableRequired

• Paragraphs cited in this workpaper (verification status shown from the register)

  References

• The activity level retained is documentedPass
• The treatment of the costs examined is documentedPass
• The fixed overheads are fully split between inventories and expenseNot evaluated
• The cost of inventories is determinedPass
• The purchase entry is balancedPass
• The production entry is balancedNot evaluated
• The interest entry is balancedNot evaluated

Assets

230,400

Liabilities

230,400

Profit or loss

0

OCI

0

Equity

0

• Item or batch measured (description, quantities, purchased or produced)

  TextRequired

• Purchase price

  Number

  For deferred settlement terms, enter the price for normal credit terms: the difference with the amount paid is interest expense (para. 18). Leave blank for an item produced without a specific purchase.

• Import duties

  Number

• Other taxes not subsequently recoverable from the taxing authorities

  Number

• Transport, handling and other costs directly attributable to the acquisition

  Number

• Trade discounts

  Number

• Rebates and other similar items

  Number

• Recoverable tax invoiced (outside cost)

  Number

• Materials drawn from inventory for production (at their cost)

  Number

  720,000

• Direct labour

  Number

  210,000

• Variable production overheads (based on actual use)

  Number

  90,000

• Fixed production overheads for the period

  Number

  420,000

• Normal capacity retained (units)

  Number

  6,000 units

  Average production expected over a number of periods or seasons under normal circumstances, taking into account planned maintenance; the actual level may be used if it approximates normal capacity (para. 13). The figure is a documented estimate of the entity, never set by the standard.

• Actual production for the period (units)

  Number

  4,800 units

• Other costs incurred in bringing the inventories to their present location and condition

  Number

• Costs examined and treatment considered (storage, waste, administrative overheads, selling, financing)

  TextRequired

• Amount paid under the deferred settlement terms

  Number

• Price for normal credit terms

  Number

• Evidence obtained and referenced (category, document reference)

  EvidenceRequired

IAS 2 §10IAS 2 §11

• Components of the costs of purchase

  ChecklistRequired

  • Cost of inventories: costs of purchase, costs of conversion and other costs of bringing them to their present location and condition
  • Purchase price, import duties and non-recoverable taxes included
  • Taxes subsequently recoverable excluded from cost
  • Transport, handling and other directly attributable costs included
  • Trade discounts, rebates and similar items deducted

IAS 2 §12IAS 2 §13

• Components of the costs of conversion

  Checklist

  • Costs directly related to the units of production (such as direct labour)
  • Systematic allocation of fixed and variable production overheads
  • Fixed overheads allocated on the basis of the normal capacity of the production facilities
  • Low production: fixed amount per unit not increased, unallocated overheads expensed in the period
  • Abnormally high production: fixed amount per unit reduced so that inventories are not measured above cost
  • Variable overheads allocated on the basis of the actual use of the production facilities

IAS 2IAS 2 §16IAS 2IAS 2 §18

• Treatment of other costs

  ChecklistRequired

  • Other costs included only to the extent they bring the inventories to their present location and condition
  • Abnormal amounts of wasted materials, labour or other production costs excluded
  • Storage costs excluded, unless 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 excluded
  • Selling costs excluded
  • Borrowing costs included only in the limited circumstances identified in IAS 23
  • Deferred settlement terms containing a financing element: difference recognised as interest expense over the period of the financing

IAS 2 §10IAS 2 §11IAS 2 §12IAS 2 §13IAS 2 §18

• Costs of purchase

  CalculationRequired

  0

  Purchase price ; Import duties ; Other taxes not subsequently recoverable from the taxing authorities ; Transport, handling and other costs directly attributable to the acquisition ; − Trade discounts ; − Rebates and other similar items

• Allocation basis of fixed overheads (higher of normal capacity and actual production, in units)

  Calculation

  6,000 units

  Normal capacity retained (units) ; Actual production for the period (units)

  Using the higher of the two levels reflects paragraph 13: with low production, the amount per unit stays at the normal capacity level; with abnormally high production, it is reduced. If the entity uses an actual level that approximates but is below normal capacity, enter that actual level as the normal capacity retained.

• Fixed overheads allocated (fixed overheads × actual production / allocation basis)

  Calculation

  336,000

  Fixed production overheads for the period ; Allocation basis of fixed overheads (higher of normal capacity and actual production, in units) ; Actual production for the period (units)

• Unallocated fixed overheads, recognised as an expense in the period

  Calculation

  84,000

  Fixed production overheads for the period ; − Fixed overheads allocated (fixed overheads × actual production / allocation basis)

• Production costs included (materials drawn, direct labour, variable overheads, fixed overheads allocated)

  Calculation

  1,356,000

  Materials drawn from inventory for production (at their cost) ; Direct labour ; Variable production overheads (based on actual use) ; Fixed overheads allocated (fixed overheads × actual production / allocation basis)

  Each cost is entered only once: materials bought for the batch are in the costs of purchase, materials drawn from existing inventory are entered here at their cost.

• Cost of inventories (purchase + production + other costs included)

  CalculationRequired

  1,356,000

  Costs of purchase ; Production costs included (materials drawn, direct labour, variable overheads, fixed overheads allocated) ; Other costs incurred in bringing the inventories to their present location and condition

• Financing element (amount paid − price for normal credit terms)

  Calculation

  0

  Amount paid under the deferred settlement terms ; − Price for normal credit terms

• Purchase recorded in inventories

  EntryRequired

  Debit Inventories ← Costs of purchase ; Debit Recoverable tax ← Recoverable tax invoiced (outside cost) ; Credit Payables (costs of purchase) ← Costs of purchase ; Credit Payables (recoverable tax) ← Recoverable tax invoiced (outside cost)

  Teaching assumption: all the costs of purchase are owed to suppliers; adapt the credit side if a cost is settled otherwise.

• Production costs included in inventories and unallocated fixed overheads

  EntryRequired

  Account	Debit	Credit
  Inventories (production costs included)	1,356,000
  Unallocated fixed overheads expense	84,000
  Production costs by nature (transferred)		1,356,000
  Production costs by nature (unallocated fixed overheads)		84,000

  Teaching assumption: the costs of the period are first recorded by nature, then transferred to inventories for the part included; the unallocated fixed part remains an expense (para. 13).

• Interest expense on deferred settlement

  EntryRequired

  Debit Interest expense ← Financing element (amount paid − price for normal credit terms) ; Credit Payables ← Financing element (amount paid − price for normal credit terms)

  Total amount of the financing element; it is recognised as interest expense over the period of the financing (para. 18). The entry carries the total amount: it is appropriate only if the financing falls within the period; otherwise, use the share of the period.

IAS 2 §13IAS 2IAS 2 §16IAS 2IAS 2 §18

• Activity level of the period and allocation of fixed overheads

  JudgmentRequired

  Production below normal capacity: allocation on normal capacity, unallocated overheads expensed

  Production below normal capacity: allocation on normal capacity, unallocated overheads expensed / Actual production approximates normal capacity: actual level used / Abnormally high production: allocation on actual production, amount per unit reduced / Not applicable: purchased item, no fixed production overheads

• Rationale: facts relied on, analysis, alternative rejected

  TextRequired

• Treatment of the costs examined

  JudgmentRequired

  Partly included, the remainder expensed

  Included in the cost of inventories / Recognised as an expense in the period / Partly included, the remainder expensed

• Rationale: facts relied on, analysis, alternative rejected

  TextRequired

• Impact by caption, derived from the entries above (the Notes line refers to the disclosures)

  TableRequired

• Paragraphs cited in this workpaper (verification status shown from the register)

  References

• The activity level retained is documentedPass
• The treatment of the costs examined is documentedPass
• The fixed overheads are fully split between inventories and expensePass
• The cost of inventories is determinedPass
• The purchase entry is balancedNot evaluated
• The production entry is balancedPass
• The interest entry is balancedNot evaluated

Assets

1,356,000

Liabilities

0

Profit or loss

1,356,000

OCI

0

Equity

1,356,000