This presentation has been put together for year 12 accounting students studying their VCE in Victoria, Australia. It outlines the difference between product and period costs, how they are recorded. It also discusses net realisable value and its treatment in the accounting records.

1. Putting a value on Inventory

2. Product vs Period Costs Sarshi’sSports Store

3. Cost of inventory Is basically the purchase price of an item May include other expenses incurred in buying that particular item of stock. Egcosts been in getting the stock into a condition and location ready for sale

4. Where do you want the 10 trampolines? That will be $5 delivery cost for each trampoline

5. Situation 2

6. ??How are delivery costs Accounted for?

7. That will be $5 delivery cost for each trampoline

8. Product Cost It is clearthat the $5 is per trampoline Where cartage can be identified to individual inventory items, then becomes part of the cost of that inventory item. Recorded on stock card

9. On the fourth day of August..... The ‘True Sports’ sent to me...... 30 cricket balls 20 tennis balls 15 helmets And a slippery dip!

10. Period Cost

11. Period cost Happens when there are many items delivered. Not possible to isolate the cartage per inventory item Becomes period cost and is therefore written off as an expense

12. Period cost = expense in Profit and Loss statement Product cost = cost of particular inventory item or stock.

13. Scenario “Pete’s Pub Supplies” Ten bar stools $75 plus delivery fee $10 One keg, cost $50 plus delivery fee of $10

14. Determining the cost Is it relevant? Use the materiality test Determine whether significant! Will the omission of the cost affect decision making Is it relatively important?

15. Is cost relevant or material? If YES, eg purchase 1 (keg), add it to the cost of inventory Enter on the stock card at cost price of $50 + $10 If NO, treat delivery fee as an expense (cartage inwards in the cost of goods sold)

16. Materiality General rule = 10% cost or more makes cost relevant to inventory.

17. Lower of cost or net realisable value Basic rule = Inventory recorded at cost price But....may be exceptions!

18. NRV NRV = Net Realisable Value = estimated selling cost less any costs incurred in marketing, selling or distribution of item Must be able to trace costs back on individual basis

19. Bar Stools Expected selling price = $25 Pays a commission of $5 NRV = $20

20. Principle of Conservatism Caution when preparing reports

21. Conservatism means...... Recognize losses when they if they are expected to occur Recognize revenue when it s actually earned

22. Balance Day – valuing inventory Sometimes stock items may have estimated NRV lower than the cost price. Why?

23. Superseded by new model Obsolete Out of season or fashion Damaged Shop-soiled Deliberately sold below cost

24. If inventory sold for < cost NRV is used to value inventory Avoids overstating the Balance Sheet Cost of inventory and its NRV be stated on individual product basis (not inventory as a whole)

25. ???

27. Stock take

28. Compared with NRV

29. General Entry required NRV = $16000 Stock Card = $19000 Reduced value is shown as general journal entry

31. Make adjustments to stock card!

32. Remember! Is it relevant to individual stock items Is it a significant cost?