Reporting the costs of inventory in the financial statements

Last updated: 28.03.2016

Costs are usually debited as an expense in the entity´s profit and loss statement. But it is not often the case for costs incurred in the inventory production process. Direct costs, usually together with allocated production indirect costs (production overheads), form the value of various forms of inventory (raw materials, work in progress, finished goods). These costs become part of profit & loss statement at the moment the inventory is sold.

 

WHERE CAN THESE “COSTS” ARE FOUND IN FINANCIAL STATEMENTS? 

  • before the production starts →    raw material in balance sheet
  • during the production process  → work in progress  in balance sheet
  • after the finished production, but before the sale → finished goods in balance sheet
  • after the sale →  cost of goods sold in profit and loss, which is booked at the same time with revenues (7)

 

And which costs are included to the value of inventory?

Usually direct costs and allocated indirect production costs (production overheads). Non-production indirect costs (non-production overheads) such as administrative, selling or distribution overheads are usually expensed.

The treatment depends on the accounting standard/system used. The inventory under IAS 2 – Inventory is valued as follows.



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