MFRS 102 Inventories: Effective Date: 1 JANUARY 2012

MFRS 102
INVENTORIES
EFFECTIVE DATE:
1 JANUARY 2012
MFRS102: INVENTORIES 1
Job-order costing
Objective of MFRS102
Objective : to prescribe the accounting treatment for
inventories.
A primary issue in this standard is to
1. determine the amount to be recognised as
asset and
2. amount to be charged as expenses against the
related revenue
Scope
This Standard applies to all inventories, except:
a)work in progress arising under construction contracts,
including directly related service contracts (see MFRS
111 Construction Contracts);
b)financial instruments (see MFRS 132 Financial
Instruments: Presentation and MFRS 139 Financial
Instruments: Recognition and Measurement); and
c) biological assets related to agricultural activity and
agricultural produce at the point of harvest (see
MASB ED 50 Agriculture).
Definition
Measurement
costs of
purchase
Direct Material
costs of Direct Labor
Cost of Material Cost
Inventories conversion
other costs incurred in

bringing the inventories
to their present location
and condition.
Costs of Purchases
 The costs of purchase of inventories comprise of:
1. the purchase price,
2. import duties and other taxes (other than those
subsequently recoverable by the enterprise from
the taxing authorities),
3. and transport, handling and other costs directly Freigh
attributable to the acquisition of finished goods,
materials and services.
 Trade discounts, rebates and other similar items are
deducted in determining the costs of purchase.
Costs of Conversion
Conversion costs refer to cost incurred to convert the
raw material into finished goods.
Conversion costs are production costs, such as labour
and overhead, that are directly related to the
production of the output.
Overhead – variable and fixed
Variable overhead – indirect costs vary directly with
the level of activity
Fixed overhead – indirect cost that remain constant
regardless of the level of activity.
Costs of Conversion
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.
Costs of Conversion
Actual production units <budgeted production units = use
budgeted production units
fixed overhead allocated to each unit of production is not
e increased as a consequence of low production or idle plant.

r Unallocated overheads are recognised as an expense in the period in
which they are incurred.
Actual production units >budgeted production units = use actual
production units
fixed overhead allocated to each unit of production is decreased so
that inventories are not measured above cost.
Variable production overheads are allocated to each unit of production
on the basis of the actual use of the production facilities.[MFRS 102.13].
Costs of Conversion
Example 2:
AAN budgets that it will manufacture 500,000 units of windbreakers in
2016. The budgeted fixed production overhead is estimated at RM3 million.
The entity’s policy is to allocate fixed overhead based on units of production.
The actual units produced in 2016 is 400,000 units
How much cost should be allocated in 2016?
Units: 500,000
Fixed Production Overhead: RM 3M
Actual Unit: 400,000
Budgeted > Actual  Use Budgeted Unit
Costs of Conversion
The pre-determined overhead allocation will be:
RM3,000,000 / 500,000 units = RM6 per unit
The fixed overhead allocated to the units produced in
2016 is RM6 x 400,000 = RM2.4 million
The RM600,000 that is not allocated is expensed off in
the statement of profit or loss.
Supposed in 2016, actual production was 600,000 units
and the actual overhead incurred was RM3 million.
The amount allocated to each unit is
RM3,000,000/600,000 = RM5 per unit
Cost Formulas
 The purpose is how to assign the costs to the
various products in order to determine the cost of
sale and closing inventory.
 Cost formulas can be used are:
1. Specific Identification Method
2. First in First Out (FIFO) Method
3. Weighted Average Method
Cost Formulas
1. Specific Identification Method
Applicable for products that are not interchangeable
and are segregated for a specific project.
The costs are assigned based on specific
identification method.
Examples – making special furniture and make to
order products.
Cost Formulas
2. First in First Out (FIFO) Method
The FIFO formula assumes that the items of
inventory which were purchased first are sold first,
and consequently the items remaining in inventory at
the end of the period are those most recently
purchased or produced.
Cost Formulas
3. Weighted Average Method
 The cost of each item is determined from the
weighted average of the cost of similar items at the
beginning of a period and the cost of similar items
purchased or produced during the period.
 The average may be calculated on a periodic basis,
or as each additional shipment is received,
depending upon the circumstances of the
enterprise.
COST
COSTFORMULAS
FORMULAS
The product data shown below for Bow Valley

Electronics will be used to explain perpetual inventory
costing using two assumed cost flow methods:
FIFO AVERAGE COST
Bow Valley Electronics

Z202 Astro Condensers
Unit Total
Date Explanation Units Cost Cost
01/01 Beginning inventory 100 $10 $ 1,000
04/15 Purchase 200 11 2,200
08/24 Purchase 300 12 3,600
10/09 Sales 550
11/27 Purchase 400 13 5,200
MFRS102: INVENTORIES
Total 18
$ 12,000
COST
COSTFORMULAS
FORMULAS––FIFO
FIFO
Under FIFO, the cost of the earliest goods on hand prior to

each sale is charged to cost of goods sold. Therefore, the cost
of goods sold on September 10 consists of the units on hand
January 1 and the units purchased April 15 and August 24.
Date Purchases Sales Balance

January 1 (100 @ $10) $1,000
April 15 (200 @ $11) $2,200 (100 @ $10)
(200 @ $11) $3,200
August 24 (300 @ $12) $3,600 (100 @ $10)
(200 @ $11)
(300 @ $12) $6,800
September 10 (100 @ $10)
(200 @ $11) $6,200 (50 @ $12) $600
(250 @ $12)
November 27 (400 @ $13) $5,200 (50 @ $12)

(400 @ $13) $5,800
COST
COST FORMULAS
FORMULAS ––WEIGHTED
WEIGHTEDAVGERAGE
AVGERAGE
A new average is computed each time a purchase is made.

On April 15, after 200 units are purchased for $2,200, a total of
300 units costing $3,200 ($1,000 + $2,200) are on hand.
The average cost is $10.667 ($3,200/300).
Date Purchases Sales Balance

January 1 (100 @ $10)
$1,000
April 15 (200 @ $11) $2,200 (300 @ 10.667)
$3,200
August 24 (300 @ $12) $3,600 (600 @ 11.333)
$6,800
September 10 (550 @ 11.333)
$6,233 (50 @ $11.333)
$567
November 27 (400 @ $13) $5,200 (450 @ 12.816)
MFRS102: INVENTORIES $5,767 20
NET REALISABLE VALUE
Net Realisable Value
Example :
ABC has 100 units of product Y which it acquired for RM15 per unit. This inventory can
be sold at RM21 per unit and the selling cost is estimated at RM2 per unit. The net
realizable value of 1 unit is RM19 (RM21-RM2).
As the cost is less than NRV, the inventory will be disclosed at:
RM15 x 100 = RM1,500
Supposed the inventory damaged and could only be sold for RM10 each, the net
realizable value per unit will be RM10 less RM2 = RM8.
As the net realizable value is lower than cost, the inventory will accounted for at:
RM8 x 100 = RM800
The difference of change in the cost and the net realizable value = RM 15 – RM 8 = RM 7
RM 7 x 100 = RM 700
This needs to be expensed off in the book.
Example 3:
AAN Sdn Bhd buys used cars, reconditioned them and sells
them. At the end of year 4, AAN Sdn Bhd provided the following
information on its year-end-stock of cars (inventory)
RM
Cost of five cars 40,000
Costs incurred on reconditioning the cars 25,000
Further costs to be incurred for the cars to be in 14,000
saleable condition
Selling price of reconditioned cars 103,000
Calculate the cost and net realisable value.
The cost of the cars is:
RM
Cost of five cars 40,000
Costs incurred on work done 25,000
Total cost 65,000
RM
Selling price of reconditioned cars 103,000
Less: Costs to be incurred for the cars to (14,000)
be saleable condition
Net realisable value 89,000
In a situation where an entity has numerous
quantities and variety of inventories generally
inventories may be written down to net
realisable based on item by item, group similar
or related items.
Example 4:
AAN Sdn Bhd has the following items of inventory whose cost and
net realisable value is given:
Item Group Cost (RM) NRV (RM)

A 1 200 400
B 1 250 200
C 1 230 270
D 2 450 380
E 2 560 500
F 2 570 440
G 3 640 500
H 3 660 720
I 3 670 700
Example continued:
Required:
Compute the value of closing inventory to be
disclosed in the balance sheet. Write downs are to be:
1. Item by item
2. Group by group
Item Group Cost (RM) NRV (RM) Cost
A 1 200 400 200
B 1 250 200 200
C 1 230 270 230
D 2 450 380 380
E 2 560 500 500
F 2 570 440 440
G 3 640 500 500
H 3 660 720 660
I 3 670 700 670
Total 3,780
Item Group Cost Cost by NRV NRV by Cost
(RM) Group Group
A 1 200 400
B 1 250 200
C 1 230 680 270 870 680
D 2 450 380
E 2 560 500
F 2 570 1,580 440 1,320 1,320
G 3 640 500
H 3 660 720
I 3 670 1,970 700 2,000 1,970
Total 3,970
Reversal
NRV (X1): 100
Cost (X1): 50
Cost = 50 Amount of the inventory should appear in
the book.
NRV(X2): 30 Either NRV or Cost, choose the lowest.
Cost (X2): 50 The actual cost when first bought = 50, so

the maximum reversal is only 50.
Cost = 30
NRV (X3): 120
Writing Down to Net Realisable Value
A fall in the price of raw materials and other supplies may
indicate the cost of the current finished goods exceeding
the net realisable value.
Selling price of Finished Goods > Cost:
 Do not write down materials’ carrying value
Selling price of Finished Goods < Cost
 Materials written down to NRV (when NRV is not available, use
replacement cost)
If in the future, the sale price increases, then the value of
these inventories is increased back to cost.
Example 6:
 A manufacturer of biscuits has 100 kilograms of strawberry flavoured flour.
The cost of the flour is RM3 per kilogram. One kilogram of biscuit uses 500
grams of flour and the total cost of manufacturing a kilogram of biscuit is
RM5. The selling price was RM7. There were 250 kilograms of biscuits
remaining at the end of the year.
 100 kg flour; cost per kg = RM 3
 1kg biscuit: 500g flour: cost RM5/kg of bicuits
 SP: RM 7/per kg of biscuits
 Remaining: 250 kg biscuits
 Suppose the selling price of the biscuit dropped to RM4.50 per kilogram.
As the price of the biscuit had declined the replacement cost of flour has
dropped to RM2 each. The costs of other material remain unchanged.
 Should the carrying value of flour and biscuit be written down?
Solution:
 Initially, the unsold biscuits will be disclosed at 250kg x RM5 =
RM1,250 (cost is lower than selling price).
 When the selling price of the biscuits drops to RM4.50/kg, then the
unsold biscuits is disclosed at RM1,125 (250kg x RM4.50).
 The carrying value will be written down from RM5 to RM4.50 per
kilogram.
 As the total cost of the finished product cannot be recovered by the
sale price, the carrying value of the flour has to be written down. The
best measure is replacement cost.
 Therefore, the carrying value of the flour =
RM2 x 100kgs = RM200
Condition 1: The finished product has been written down.

Condition 2: The replacement cost has dropped.
Special Situation
If the price of flour dropped down, do we need to
revise the price of the biscuits?
No, the concern is towards the finished goods, as it is
the products to be sold.
RECOGNITION AS AN EXPENSE
When inventories are sold, the carrying amount of
those inventories should be recognised as an expense
in the period in which the related revenue is
recognised.
The amount of any write-down of inventories to net
realisable value and all losses of inventories should
be recognised as an expense in the period the write-
down or loss occurs.
DISCLOSURE
Accounting policy adopted, including the cost formula used;
Carrying amount by category;
Carrying amount of inventories at NRV;
Amount s of any write-down of inventories recognised as an
expense in the period;
the amount of any reversal of any write-down that is recognised as
a reduction in the amount of inventories recognised as expense in
the period;
Circumstances that led to the reversal of a write-down;
Carrying amount of inventory pledged as security for liabilities;
Cost of inventory charged to expense for the period.
THANK YOU
Tutorial Questions:
Q1,3,6,8

MFRS 102 Inventories: Effective Date: 1 JANUARY 2012

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MFRS 102

other costs incurred in

e increased as a consequence of low production or idle plant.

The product data shown below for Bow Valley

FIFO AVERAGE COST

Bow Valley Electronics

Under FIFO, the cost of the earliest goods on hand prior to

Date Purchases Sales Balance

November 27 (400 @ $13) $5,200 (50 @ $12)

A new average is computed each time a purchase is made.

Date Purchases Sales Balance

Item Group Cost (RM) NRV (RM)

NRV(X2): 30 Either NRV or Cost, choose the lowest.

Cost (X2): 50 The actual cost when first bought = 50, so

NRV (X3): 120

Condition 1: The finished product has been written down.

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