DF & FM manufactures a range of generators that are assembled from components that are bought in from other suppliers. The company does not use a standard cost accounting system and work in progress and finished goods are valued as follows:

1. Material costs are determined from the product specification. The specification lists the components that are required to make the generators.

2. Employees record the time spent on assembling each type of generator. This information is input into the payroll system which prints out the total hours spent each week to assemble each type of generator.

3. Each employee is paid at the same rate and there is no overtime.
4. Overheads are added to the inventory value in accordance with IAS2 Inventories.
5. The financial accounting records are used to calculate the overhead costs and then this is applied as a percentage of direct labour costs.

6. For direct labour costs, it was established that the labour used for each unit in work in progress is estimated to be half that of completed units.

7. Variable overheads are assumed to be included in the direct cost of inventory

You have been presented with the following summary of direct costs in inventory:

Raw materials Work in progress Finished goods

Materials ($) 74,786 85,692 152,693

Direct labour ($) 13,072 46,584

Based on the financial records, the costs incurred for the year ended 31 December 2019 were as follows:

Direct labour 61,320

Selling costs 43,550

Depreciation and finance costs of production machines 4,490

Factory manager’s wages 2,560

Distribution costs 6,570

Other production overheads 24,820

Purchasing and accounting costs relating to production 5.450

Other accounting costs 7,130

Other administration overheads 24,770

Assume that all work in progress and finished goods were produced in August 2020 and that Q DF & FM was operating at a normal level of capacity.

As the Accountant for DF & FM manufacturers, it is your function to calculate the valuation of inventory at cost at year-end 31 December 2019.

Required:

A. Identify the components of cost of inventories as outlined by IAS 2 Inventories.

B. Explain ONE (1) component of costs of conversion as outlined by IAS 2 Inventories.

C. From the details in the financial records above, identify ONE (1) cost incurred that would not be included in the cost of inventories. (1 mark)

D. Suggest how the costs identified should be treated or recognized based on relevant accounting policies. 

E. Calculate the production overheads for inventory. 

F. Determine the production overhead rate. 

Answer rating: 100% (QA)

A Cost of Inventories IAS 2 Components of cost The cost of inventories comprises all costs of purchase costs of conversion and other costs incurred in bringing the inventories to their present locatio... View the full answer