Question 1: Open Company manufactures two type of products namely: STAR and FISH. At
the middle of Covid-19 pandemic, the company has experienced changes in cost and sales
prices during 2020. You are the controller and are responsible for the inventory valuation.
For the year 2020, you arevprovided with following information for such inventory valuation
task:
Product
Actual Production
Maximum Production Capacity
Sales
Direct material purchased and issued to the production (VAT
10% included)
Direct labour per unit
Variable overhead per unit
Fixed production overhead
Storage cost of finished items
STAR
2,200 units
2,450 units
1,800 units
$484,000
$85
$36
$173,800
FISH
1,000 units
1,500 units
900 units
$121,000
$54
$60
$160,600
$12,000
Also, you are informed that Open Co uses costing method (using unit of
production as the basic for production fixed overhead) for their inventories and has been
applied IFRS for years. There is no inventory at the beginning of the period and no workin-progress (WIP) items at the end of the period for both products. The last 5-year
production level is showed as following:
Production year
2019
2018
2017
2016
2015
STAR
2,050 units
2,390 units
1,990 units
2,020 units
1,550 units
FISH
950 units
1,130 units
840 units
1,350 units
1,230 units
1.
What is the unit cost of STAR and FISH for the period, given that VAT is recoverable tax? (8
points)
2.
For the ending inventory, you are also provided with the following information:
Product
Estimated selling price
Estimated cost of modification before selling
STAR
$440
$30
FISH
$405
$25
Determine the inventory ending value that should be showed on the statement of financial
position (balance sheet) at the end of the period. (2 points)
Solution
Answer 1:
1. Since VAT is recoverable, it must no form past of the unit cost of the product. The cost per
unit is computed as the sum of direct materials, labor and overhead per unit
Star's average capacity over the past 5 years
= (2,050 + 2,390 + 1,990 + 2,020 + 1,550)/5 = 2,000 = normal capacity [IAS2-13]
Since the actual capacity is greater than the normal capacity, the production overhead is
allocated according to the actual production
Fish's average capacity over the past 5 years
= (950 + 1,130 +840+ 1,350 + 1,230)/5 = 1,100
Since the actual capacity is lower than the normal capacity, the production overhead is
allocated according to the normal production
Direct materials per unit
Direct labor per unit
Variable overhead per unit
Fixed overhead per unit
Unit cost
STAR
=(484,000/1.1) / 2,200 = $200
$85
$36
=173,000/2,200 = $79
$400
FISH
=(121,000/1.1) / 1,000 = $110
$54
$60
= 160,600/ 1,100 = $146
$370
2.
Beginning Inventory
Actual Production
Less: Sales
Ending Inventory
NRV
Compare with Unit cost
Measurement per unit
Cost of ending inventory
STAR
0
2,200
(1,800)
400
440-30 = $410
$400
$400
=400 * $400 = $160,000
FISH
0
1,000
(900)
100
405-25 = $380
$370
$370
=100 * $370 = $37,000