Initial measurement of inventories is at cost. The cost of inventory includes: the cost of all materials that enter directly into production and the costs of converting those materials into finished goods. The direct materials costs include, in addition to the purchase price, all other costs necessary to bring them to their existing condition and location. The cost of raw materials and consumables including transportation charges, import duties, insurance, warehousing and handling costs, reductions made for trade discounts, rebates and other similar items.
Subsequent to initial recognition, entities should measure inventories at the lower of cost or net realisable value.
Cost should be determined based on specific identification for goods not ordinarily interchangeable or those segregated for specific projects. Specific identification costing is not appropriate for inventories of homogeneous products, such as raw materials to be used in production and spare parts that have often been purchased at different prices. Weighted average or FIFO may be used to determine the cost of such inventory. Any method that produces a result consistent with the principles in the standard is acceptable. Whatever application method an entity uses, it should apply that method consistently.
The requirements to measure inventory at the lower of cost and Net Realizable Value (NRV) forces the recognition of losses as they occur. Write-downs to NRV may be triggered where selling prices have declined or costs of completion or direct selling costs have increased. Some products may have become damaged or some may be held in quantities that will not be sold in a reasonable period. In these circumstances the inventories should be written down below cost to expected recoverable amounts.
Seradex offers a great deal of power and flexibility in your preferences for inventory costing. Please consult your project manager and outside auditors for a discussion of your the implementation choices available.
A short overview of some of the considerations outlined by the FASB in "Inventory Costs an amendment of ARB No. 43, Chapter 4" follows:
In keeping with the principle that accounting is primarily based on cost, there is a presumption that inventories should be stated at cost. Inventories are presumed to be stated at cost. The definition of cost as applied to inventories is understood to mean acquisition and production cost, and its determination involves many considerations. Although principles for the determination of inventory costs may be easily stated, their application, particularly to such inventory items as work in process and finished goods, is difficult because of the variety of considerations and problems encountered in the allocation of costs and charges.
For example, variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities. However, the allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates normal capacity.
In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost. The amount of fixed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant.
Unallocated overheads are recognized as an expense in the period in which they are incurred under some circumstances, Other items such as;
Idle Facility ExpenseExcessive SpoilageDouble FreightRehandling CostsScrap And Waste Materialsmay be so abnormal as to require treatment as current period charges rather than as a portion of the inventory cost. Also, general and administrative expenses should be included as period charges, except for the portion of such expenses that may be clearly related to production and thus constitute a part of inventory costs. Selling expenses constitute no part of inventory costs.
It should also be recognized that the exclusion of all overheads from inventory costs does not constitute an accepted accounting procedure. The exercise of judgment in an individual situation involves a consideration of the adequacy of the procedures of the cost accounting system in use, the soundness of the principles thereof, and their consistent application. In the case of goods which have been written down below cost at the close of a fiscal period, such reduced amount is to be considered the cost for subsequent accounting purposes.
GAAP and Physical Inventory Counts
Both GAAP and IRS rules require a physical count once a year. For more information on GAAP and Physical counts:Physical Inventory Best Practices WhitePaper
GAAP and Percentage of Completion
If your company is involved in delivering large projects see the following for a discussion revenue recognition:Percentage of Completion