Business Accounting-Specific Measurement of Inventory

In this report we will discuss about business accounting and below are the summaries point:- AASB 102 mentions specific measurements of inventory in paragraph 9, stating that inventory value must be lower than the cost of net realizable value. Paragraph 10 highlights relevant calculations for determining inventory value, including cost of purchase, cost of conversion, and transportation cost. AASB 102 provides detailed information about cost, measures, and formulas for accurate reporting in annual reports. Two techniques for improving operational capability are mentioned in AASB 102: standard cost method and retail method. The standard cost method considers materials, supplies, labor, efficiency, and capacity utilization, while the retail method is used by the retail industry and calculates inventory using an average percentage.

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Business Accounting
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1. Explaining and evaluating the measurement of inventory in accordance with the relevant
accounting standard:
Specific measurement of inventory is mainly mentioned in paragraph 9 of AASB 102,
which directly states that the inventory value needs to be lower than the cost of net realizable
value. Moreover, the AASB 102 paragraph 10 highlights the relevant calculations, which can be
used for calculating the cost of inventories and determine the exact value of inventories
maintained by the company after adjusting the cost of purchase, cost of conversion, and other
transportation cost. The standard provides information regarding the cost that needs to be
included by the company while detecting the accurate level of cost incurred for holding the
inventory in their books. Steenkamp and Steenkamp (2016) mentioned that AASB 102 provides
in-depth information regarding the cost, measure and formulas that can be used by the company
in depicting the accurate level of information in their annual report.
There are specifically two techniques that are mentioned in AASB 102, which can be
used by the organization for improving their current operational capability (Aasb.gov.au 2019).
The standard cost method and retail method is mentioned in the AASB standard, which can be
used by the organization in accordance with their requirements. The standard costing method
takes in account all the relevant levels of materials and supplies, labour, efficiency and capacity
utilisation. In addition, the retail method is used by retail industry, which has large number of
inventory change and uses average percentage while calculating the inventory.
2. Identifying the inventory system applied by the company and discussing about the
advantages to the company:

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Figure 1: Inventory Valuation of Evolution Mining Limited
(Source: Evolutionmining.com.au 2019)
The above figure provides information regarding the recognition and measurement
method that has been used by Evolution Mining Limited in their 2018 annual report. In addition,
the company mainly uses the standard cost method for measuring their inventories in the annual
report. This has mainly allowed the organization to determine the required level of inventory
cost, which will be portrayed in their annual report. As mentioned in the above figure, the
inventory value calculation is dependent on the weighted average costs, which includes an
appropriate portion of fixed and variable production overhead expenditure that converts the
materials into finished goods. Moreover, the materials and supplies that are valued by Evolution
Mining Limited are mainly lower of cost and new releasable values, which are mentioned in
paragraph 9 of AASB 102 (Aasb.gov.au 2019).

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The standard cost method used by the organization for measuring the inventory provides
additional benefits to the organization, as it allows them to portray the accurate cost in their
annual report. The depiction of accurate inventory value allows the organization to comply with
the ethical clauses laid down by the AASB for preparing the annual report. Brandon (2016)
stated that AASB has engulfed in providing adequate financial conceptual framework, which is
being used by the organizations for preparing their annual reports, which does not represent
unethical values to the investors.
3. Determining the costing method applied by the company, while explaining the reason for
the method:
Figure 3: Costing Method of Evolution Mining Limited
(Source: Evolutionmining.com.au 2019)
The above figure provides information regarding the costing method that is used by
Evolution Mining Limited for evaluating its inventories during the financial year of 2018. The
company uses net realizable value for determining its inventory cost for the financial year. This
is mainly mentioned in the above figure, which indicates that the net realisable value involves
significant judgements and estimates in relation to the selling price in the ordinary course of
business less estimates costs of completion and estimated costs necessary to make the sale. The
company has mainly chosen this method for supporting the costing need, which helps in

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determining the accurate level of inventory value. The organisation is in mining industry, where
the inventory accumulated is by conducting relevant activities. Therefore, the net realisable value
would provide the organisation with adequate level of cost that is associated with the
accumulated inventory.
4. Estimating the impact of different costing method on the financial statement:
AASB 102 provides information regarding the different costing method that can be used
by the organization, while preparing the financial statements. The inventories of the organization
are needed to be realized under net realizable value method, whereas when the inventories are
not impracticable or costly then weighted average method or FIFO method can be used as per the
AASB 102, Paragraph 21-27. The use of both FIFO and Weighted average method can be
catastrophic for Evolution Mining Limited, as the annual report will not be presented with
accurate level of inventory value (Aasb.gov.au 2019). The company is engaged in mining
activities, which requires cost and other activities that needs to be conducted to complete the
production process. Hence, the use of FIFO will not allow the company to determine the accurate
level of inventories at costs, which is currently being held, whereas it will also reduce its
competitiveness in the market, as ore prices tend to fluctuate within the market.
Moreover, the weighted average method will also be non-beneficial to the company, as it
will not provide the accurate level of cost, which is incurred by the company in acquiring the
inventory. The weighted average method is mainly used for determining the cost by combining
two different prices of the same inventory. On the other hand, the company is mainly operating
in the mining industry, where the accurate cost of inventory can be determined after adding all
the relevant cost for of obtaining the ore directly from the mine. Hence, from the evaluation it

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could be understood that other costing method will not provide Evolution Mining Limited will
the required cost of their inventory, which can be determined with the help of net realizable
value. Thus, the method allows Evolution Mining Limited to project the correct and accurate
value of their inventory in the annual report.

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Reference and Bibliography:
Aasb.gov.au. 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf [Accessed 6 Feb.
2019].
Brandon, G., 2016. Mid market focus: Tax treatment of consumables and stores. Taxation in
Australia, 50(7), p.374.
Evolutionmining.com.au. 2019. [online] Available at: https://evolutionmining.com.au/wp-
content/uploads/2018/10/1858627.pdf [Accessed 6 Feb. 2019].
Loyeung, A. and Matolcsy, Z., 2015. CFO's accounting talent, compensation and
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Parle, G., Joubert, M. and Laing, G.K., 2017. Measuring economic performance of Real Estate
Developers in Australia:(A Longitudinal Study). Journal of New Business Ideas & Trends, 15(1).
Statements, F., 2018. Financial statements: 30 June 2017. Notes, 117(287,832), pp.277-997.
Steenkamp, N. and Steenkamp, S., 2016. AASB 138: catalyst for managerial decisions reducing
R&D spending?. Journal of Financial Reporting and Accounting, 14(1), pp.116-130.