IAS 2 key guidelines for the inclusion and exclusion of costs in the valuation of inventories as per accounting standards, specifically IAS 2, which deals with inventories.
### Inclusion of Other Costs
Other costs are included in the cost of inventories only if they contribute to bringing the inventories to their current location and condition. Examples include:
- **Non-production overheads**: These are indirect costs that are not directly tied to production but are necessary for the production process.
- **Design costs for specific customers**: Costs incurred for designing products tailored to specific customer needs.
### Exclusion of Certain Cost
Certain costs are excluded from inventory valuation and are instead recognized as expenses in the period they are incurred:
- **Abnormal amounts of wasted materials, labor, or other production costs**: Excess costs due to inefficiency or waste.
- **Storage costs**: Costs for storing inventory unless storage is a necessary step in the production process before a further stage of production.
- **Administrative overheads**: General administrative expenses not related to bringing the inventory to its current location and condition.
- **Selling costs**: Costs related to the sale of inventory, such as marketing and sales commissions.
### Borrowing Costs
IAS 23 addresses borrowing costs, specifying limited circumstances where borrowing costs can be included in the cost of inventories. These are generally situations where borrowing costs are directly attributable to the acquisition, construction, or production of qualifying assets.
### Deferred Settlement Terms
When inventories are purchased on deferred payment terms, any financing element (i.e., the difference between the purchase price under normal credit terms and the amount paid) is recognized as interest expense over the financing period.
### Agricultural Produce
Inventories of agricultural produce harvested from biological assets are initially measured at fair value less costs to sell at the point of harvest, in accordance with IAS 41 Agriculture. This initial measurement becomes the cost of these inventories.
### Techniques for Measurement of Cost
Two techniques for inventory cost measurement are discussed:
1. **Standard Cost Method**:
- Uses pre-determined costs based on normal levels of materials, labor, and efficiency.
- These standard costs are regularly reviewed and adjusted to reflect current conditions.
2. **Retail Method**:
- Commonly used in the retail industry for large quantities of items with similar margins.
- Cost is determined by reducing the sales value of inventory by the gross margin percentage.
- The gross margin percentage considers markdowns and is often averaged across retail departments.
These methods are accepted for convenience if they reasonably approximate the actual cost.
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International Accounting Standard 02- Part 1
International Accounting Standard 02- Part 2
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