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Unformatted text preview: 1 AF3110 Intermediate Accounting 1 2009/10 Semester 2 Topic 7 Suggested Solutions Question 1 (Chapter 11 Q8) (a) The costs to be included in valuing finished goods inventory in a manufacturing company are those costs incurred in the normal course of business in bringing the product to its present location and condition. These costs may include the purchase price together with import duties, transport, and handling costs. The purchase price should exclude any trade discounts and rebates. The manufacturing costs should include the direct manufacturing costs of labour, material, and other direct expenses, eg royalty payments. These costs should also include production overheads, consisting of all material, labour, and servicing costs incurred in production, based on the normal level of activity. Any abnormal production costs should be excluded, eg exceptional wastage. In order to arrive at production overheads, it is necessary to classify overheads by function, regardless of whether those overheads arise with time or as a result of production. For example, the rent of the factory is a production overhead arising on a time basis, but depreciation of machinery calculated on a machine-hour rate will relate to the level of production. The overheads are mainly classified into the following categories: production, selling and administration, but only production overheads are to be included in the valuation of work-in-progress and finished goods. Any central service department costs should be allocated over the functions to which their services relate. For example, the accounts department will serve all three areas of overhead classification, but a part only should be allocated to the production function. The only exception to this rule is that where there is a contract with a customer to provide goods to the customer ’ s specifications, then design, marketing, and selling costs incurred before manufacture may be included in arriving at inventory cost. 2 Cost of inventories should be determined on an individual item basis, or in some instances on a group basis, but not on an aggregate basis, when comparing cost with net realisable value. It is not always possible to identify costs with specific units, and in these cases a recognised basis of arriving at average cost should be adopted. For example, process and batch costing are recognised bases of arriving at inventory cost. When a batch costing are recognised bases of arriving at inventory cost....
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- Summer '09