Cost of inventories of a service provider : Service providers, such as cleaners, would normally measure any inventories at the cost of production. Because a service is being provided, such costs would consist primarily of lab our and other personnel costs for those employees directly engaged in providing the service. The costs of supervisory personnel and directly attributable overheads may also be included, but paragraph 19 of IAS 2 prohibits the inclusion of labor and other costs relating to sales and general administrative personnel.
Profit margins or non-attributable overheads that are built into the prices charged by service providers cannot be factored into the value of inventories. Such inventory assets would be recognized only for services ‘in-progress’ at the end of the reporting period for which the service provider has not as yet recognized any revenue.
Estimating Inventory Cost
Techniques for determining inventory cost such as the standard cost method or the retail method may be used for convenience so long as the resulting values approximate cost. Manufacturing entities determine a ‘standard’ value of materials, direct and indirect labor and overheads for each product based on normal levels of efficiency and capacity utilization.Adjustments are made at the end of the reporting period to account for variances between standard and actual costs.
Standard costs must be regularly reviewed and amended as required. The retail method is used to measure inventories of large numbers of rapidly changing items with similar margins for which it is impractical to use other costing methods. Supermarket and department store chains most often employ this method of approximating cost.
Cost is determined by reducing the sales value of the inventory by an appropriate percentage gross margin or an average percentage margin. In applying this method, care must be taken to ensure that gross margins are adjusted for goods that have been discounted below their original selling price.
