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Goldberg Inc. produces and sells electronic equipment. Which of the following inventory costs is most likely to be recognized as an expense on Goldberg’s financial statements in the period incurred?

Selling costs are expensed in the period incurred since they result in no future benefit (i.e. the inventory has been sold). Conversion costs and freight costs add value in assisting in the future sale of the related inventory. Therefore, these costs are not recognized until the inventory is ultimately sold.

Diabelli Inc. is a manufacturing company that is operating at normal capacity levels. Which of the following inventory costs is most likely to be recognized as an expense on Diabelli’s financial statements when the inventory is sold?

A)	Administrative overhead.

B)	Selling cost.

C)	Allocation of fixed production overhead.

Assuming normal capacity levels, allocation of fixed production overhead is a product cost that is capitalized as part of inventory. Thus, this cost will not be recognized as an expense until the inventory is sold (it becomes part of COGS for that period). Administrative overhead and selling costs are period costs that must be expensed in the period incurred.

Markus Ltd. is a manufacturing firm that is operating at 75% of normal capacity in the current year. Its total fixed production overhead cost for the year is $4 million. Which of the following amounts will eventually be recognized as cost of goods sold on the income statement?

The allocation of fixed production overhead is based on units produced relative to normal production capacity. Since Markus is operating at 75% of normal capacity, 75% of the fixed overhead (75% × $4 million = $3 million) is capitalized (and eventually recognized as cost of goods sold when the related inventory is sold) and 25% of the fixed overhead (25% × $4 million = $1 million) is expensed in the period when the cost is incurred.

Judah Inc. prepares its financial statements under IFRS. On December 31, 20X8, Judah has inventory of manufactured goods with a cost of $720,000. The estimated selling cost of that inventory is $50,000 and its market value is $740,000. By January 31, 20X9, none of the inventory has been sold but its market value has increased to $810,000. Selling costs remain the same. Which of the following entries is most likely permissible under IFRS?

A)	Write down inventory by $30,000 on December 31, 20X8 and write up inventory by $70,000 on January 31, 20X9.

B)	Make no adjustments to the valuation of inventory on either date.

C)	Write down inventory by $30,000 on December 31, 20X8 and write up inventory by $30,000 on January 31, 20X9.

IFRS rules require inventory to be valued at the lower of cost or net realizable value (NRV). NRV is calculated as estimated sales price less estimated selling costs. At December 31, 20X8, NRV = $740,000 ? $50,000 = $690,000. Since cost is $720,000, then the lower of cost or NRV is $690,000 and a $30,000 writedown is required.

At January 31, 20X9, NRV = $810,000 ? $50,000 = $760,000. Under IFRS, when inventory recovers in value after being written down, it may be “written up” and a gain recognized in the income statement. The amount of such gain, however, is limited to the amount previously recognized as a loss. Under IFRS it is not permissible to report inventory on the balance sheet at an amount that exceeds original cost, except in the case of some agricultural and mineral products. Since cost is $720,000, the lower of cost of NRV is $720,000.