Note to CAS 2: Inventory

Cambodian Accounting Standard 2

CAS 2: Inventory

By : Ou Chandara
Koy Ponlork

Objective of CAS 2

The objective of CAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognizing an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.

Scope

Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), materials and supplies that are consumed in production (raw materials) , and rendering services.

However, CAS 2 excludes certain inventories from its scope:

work in process arising under construction contracts, Construction Contracts

financial instruments

producers' inventories of livestock, agricultural and forest products, and mineral ores to the extent that they are measured at net realizable value in accordance with well established practices in certain industries.

Accounting Treatment

Inventories should be measured at the lower cost or net realizable value in accordance with the prudence concept.

Cost Measurements

Cost of Inventory: costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Purchased Cost: purchase price, import duties and other taxes, transportation, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.

Cost of Conversion: costs that is directly related to the units of production and they also include Fixed and Variable costs.

Direct Labor

Production overhead

Variable Cost : indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labor.

Fixed Cost : indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance.

Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be suitable to include non-production overheads or the costs of designing products for specific customers in the cost of inventories .

Cost of Service

Cost of services consists primarily of the labor and other staff costs directly engaged in providing the service, including supervisory personnel, and attributable overheads.

Labor and other cost related to sale are not are not included in the cost of inventory, but they are recognized as expenses within the period.

Techniques for the Measurement of Cost

The following techniques maybe used to measure the cost of inventories:

Standard Cost take into account normal levels of materials and supplies, labor capacity. They are regularly reviewed and, if necessary, revised in the light of current conditions.

The retail method is often used in the retail industry for measuring inventories of large numbers of rapidly changing items.

Apply when it is impracticable to use other costing method.

Reduce sale value of inventories by percentage of gross margin.

Inventory is marked down to below its original selling price.

Average percentage is used for group of products.

Cost Formulas

The cost of inventories may be assigned by using the following cost formula;

The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by using specific identification of their individual costs.

FIFO : items which were purchased first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced.

Weighted Average: cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. Cost may be calculated on a periodic basis, or goods is received.

Net Realizable Value (NRV)

Net realizable value is the estimated selling price less the estimated cost of completion and costs necessary to make the sale.

The cost of inventories may not be recoverable if those inventories are damaged and if the estimated cost of completion have increased.

Inventory are usually written down to net realizable value. NRV estimates should be based on the most reliable evidence available and it should be written down to NRV on an item-by-item basis, stock losses, abnormal wastage and non-allocated production overhead