Inventory Valuation
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Issues
- Issue following IAS 2 (inventory valuation) as a result of
- freight cost on imports that required quick and accurate accounting without impacting the operations and warehousing / logistics activities
- Missing on cost capitalization due to lack of understanding of accounting technicalities as well as the system
- Eligible overheads not absorbed into the cost of inventory due to lack of understanding behind cost drivers and related knowledge
- PPV (product price variances i.e the difference between the PO and the invoice by the vendor as a result of unexpected inflation in the current economy) not accounted for properly
- Normal loss not capitalized as part of inventory cost rather expensed out and treated as abnormal loss/ waste.
- No standard documented process for tracking inventory held with third parties
What we did
- Educated procurement, warehousing and relevant stakeholders on cost capitalization that is allowed under accounting standards.
- Helped identify cost driver behind various overheads and calculated cost per unit that could be capitalized in different product lines. Also set up a process for quarterly review between the actuals and the capitalized cost to fine tune the capitalization rates.
- Helped build a process in the system to capitalize freight cost using historical values of similar imports.
- Agreed with external auditors (for freight cost and PPV) a threshold acceptable for variation between actual cost vs the capitalized cost.
- Within limit: charge the difference to profit and loss account
- Out of limit: adjust the difference in the cost of the inventory remaining in hand.
- Designed normal loss calculation mechanism to capitalize the inventory cost according to the accounting standards.