Summary of points of standard accounting of materials and goods inventory
The first part
Evaluating and reflecting the inventory of materials and goods has an important effect in determining and presenting the financial status and financial performance of business units.
Inventory of materials and goods refers to assets that (paragraph 3):
It is kept for sale in the normal operation of the business unit.
In order to make a product or provide a service, it is in the production process (work in progress),
In order to make a product or provide a service, it is purchased and stored (raw materials), and
It has a consumption nature and is used indirectly for the activity of the business unit (consumables).
The inventory of materials and goods should be measured based on the “lower cost and net sales value” of individual items or groups of similar items. (Paragraph 4)
The cost price of the inventory of materials and goods should include the following items:
Purchase expenses: includes the purchase price and any other expenses such as duties and customs duties and transportation that are directly related to the purchase (paragraph 7).
Conversion expenses: includes the expenses that are directly related to the manufactured items, and also includes the production overhead (both fixed and variable) that occurs to convert raw materials into products or provide services. (Paragraph 9)
Other expenses: Other expenses are considered as a part of the cost of the inventory only to the extent that it is clearly related to the delivery of the inventory of materials and goods to its current location and condition. (Paragraph 17)
Expenses related to unused capacity must be reflected in the period of occurrence as operating expenses and after gross profit in the profit and loss statement (paragraph 11).
One of the reasons that is sometimes mentioned in relation to the non-inclusion of certain overhead costs in the cost price is the need to adopt a conservative approach in evaluating the inventory of materials and goods. (Paragraph 13)
In cases where the conversion costs of each individual product cannot be identified, these costs are allocated to the products on a logical and uniform basis. (Paragraph 14)
In most cases, secondary products are insignificant in nature, so these products are measured at the net sales value and the amount obtained is deducted from the cost price of the main product. (Paragraph 14)
Issues may arise in allocating the expenses of the central service departments. The basis for allocating such expenses should be the amount of services that are provided in relation to various operations. (Paragraph 16)
The following are examples of expenses that are not included in the cost of inventory and are recognized as expenses in the period of occurrence:
Abnormal amounts related to material waste, wages and other production costs (controllable waste)
Warehousing expenses except for the expenses incurred in the production process for storing products that need further processing.
Administrative overhead that does not play a role in bringing the inventory to the current location and condition.
Sales expenses (clause 18)
Financial Tax Group of Iran Consultants Authority
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