IAS 2 Inventories - Cost of Completion / Cost of Conversion / LIFO

KimRs
KimRs Registered Posts: 6
Q1. Is anyone able to explain or provide an example which would help clarify the difference between Cost of Completion / Cost of Conversion referred to under the IAS 2 Inventories?

I understand cost of conversation is for example to get a raw material into it's finished goods state for resale, however I am struggling to understand what is then meant by cost of completion under the NRV calculation ?

A question I had in a text book was : Calculate the value of inventory based on the following:
45 Units of M in a partly completed state. Costs to date have amounted to £240 per unit and completion costs will amount to £90 per unit. The selling price per unit is £360.
In the answer the completion costs were deducted from the selling costs, in my mind if the item is partly completed the completion cost would have been added as part of the production costs.

Q2. Is anyone able to explain in a little more detail why LIFO is not permitted by IAS2, I assume this is due to the impact on profit.

Thanks in advance.
Kim


Comments

  • Pian32
    Pian32 MAAT Posts: 449
    Q1- IAS2 needs the lower of the cost or the realisable value. The current cost is £240 so an appoximation of the realisable value is the final price £360 - the value not yet added £90= £270. So the value would be £240 unless I've misunderstood something.

    Q2 - There's a mix of things that go into it but the main reason, is to make the balance sheet match according to current market rates. Inventory bought a long time ago would be valued differently now and if non perishable and if it doesn't deteriorate then it's true value is going to be closer to the more recently bought materials. Another side is that in an inflationary economy using LIFO would reduce the tax liability.
    AAT Level 4, MAAT
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    KimRs
  • KimRs
    KimRs Registered Posts: 6
    Really appreciate your response Pian32, thank you
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