ACCA F2 - Management Accounting
Who holds inventory?
A building is recognised as current assets (inventory) for
property dealer, a vehicle for vehicle showroom but the same thing will be
non-current assets for a manufacturing company. Identifying inventory is the
first step to record and manage inventory. You start this initial step by
asking a simple question. In which sector your organisation is operating? Is it
goods or services? In next step you need to find out what are you offering as
goods or services? Once you find what you are offering the real problem starts.
For three different organisations in coming example identify the offering as
service or good. E.g. (A) company produces and distributes hydro-electricity, (B)
company produces automated controlling unit for monitoring electricity
consumption unit by household and (C) company produces special software to use
in hydro-electricity projects.
For most of manufacturing organisation inventory forms a big
amount in balance sheet.
Take example of two different industries in same sector. Hydro-electricity
cannot hold inventory while a petroleum company can have stock of unprocessed,
semi-processed and processed fuel. Obviously, everyone knows how these two are
charged to final consumers.
Service sector organisations hold minimum/no inventory. This
is because of following nature of
service offered. Heterogeneity (output differs - different specification
required), Perishability (cannot carry stock), Simultaneity (produced and
consumed at same time), Intangibility (not-tangible).
Have you thought of inventories held by not-for-profit?
Initially, all inventories received at no cost or nominal costs are initially
recognised at fair value at date of acquisition. After, inventories are
subsequently measured at costs, adjusted when applicable for any loss of
service potential. In respect of not-for-profit entities, inventories held for
distribution are assets: a) held for distribution at no or nominal
consideration in the ordinary course of operations b) in the process of
production for distribution at no or nominal consideration in the ordinary
course of operations. or c) in the form of materials or supplies to be consumed
in the production process or in the rendering of services at no or nominal
consideration.
"Not-for-profit entity requirements in Australian Accounting
Standards - Update Dec 2008"
Inventories held for
distribution by a not-for profit entity are distributed, the carrying amount of
those inventories shall be recognised as an expenses. The amount of any
write-down of inventories for losses of inventories shall be recognised as an
expense in the period in which the write-down or loss occurs. The amount of any
reversal of any write-down of inventories arising from a reversal of the circumstances
that give rise to the loss of service potential shall be recognised as n
expense in the period in which the reversal occurs.
CIMA Article: The just in time method
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