Reading 36: Inventories LOS a习题精选

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.

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.

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.