Evaluation of Caltex Limited's Inventory Costing Methods in Compliance with AASB Standards

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Introduction
Australian Accounting Standards Board (AASB) has offered important directives and
frameworks in financial reporting. The AASB helps in setting standards for financial
reporting for listed companies in Australian (Needles, Powers, and Crosson, 2013). All
companies in Australia are required to comply with AASB accounting standards when
reporting their financial performance. AASB conceptual framework is a system of ideas that
form basis for consistent standards that rules to be used in accounting standards and
accounting policies (Legislation.gov.au, 2004). AASB 102 inventory was updated as a result
of amendment from the International Accounting Board. This is to give a clear principle,
objective and key definitions of inventory that qualify for recognition and entry in the
financial statements. AASB 102 helps reduce errors of recognition, definition and
measurement of inventory. The AASB Conceptual Framework is therefore developed to offer
guidelines to accounting standards and companies board for developing accounting policies
where there are no accounting standards (Rankin et al., 2012). This enables firms’ financial
reports to have the same interpretation to all financial information users. The following essay
discusses the Caltex Limited annual financial report in relation to AASB 101 and AASB 102
inventory standard. Caltex is one of the leading companies in transportation and distributors
of petroleum to other suppliers. This has enabled the company to grow and gain dominance in
its operations. Caltex financial report is important investors, government, management,
lending institutions, employees and other stakeholders.

Measurement of inventory
Companies tend to choose a preferable measurement of inventory. The cost of an entity’s
inventory is incurred either by acquiring or production of products that are ready for selling
(Cairns et al., 2011). In terms of measurement inventory, Caltex uses standards that are
within the AASB standards. This has enabled Caltex not only to be under regulations but also
evaluate lower cost. Caltex has used measuring cost of inventory such as purchase cost,
conversion cost and other cost. Purchase cost was cost incurred until commodities possessed
by the company. They include import duty, purchasing price, irrecoverable tax, transportation
costs and handling cost. Deductions were made due to trade discount, recoverable tax and
rebate and government grant or subsidy. Conversion costs are expenditures that the company
incurred during processing of raw material into finished goods. This may include variable
product, fixed production and wages. Other cost like royalties paid.
FIFO costing method
Caltex limited decided to use FIFO costing method to evaluate its inventory. According to
accounting theory, FIFO is the oldest method used compared to last in, first out method and
weighted average (Muller, 2011). FIFO uses its revenue to match against its cost of goods
sold to consumers or retailers (Jesswein, 2010). Recent commodities that were purchased are
added at the ending of every inventory. The advantage of using FIFO is that, profit will
always be higher after deduction of taxes. According to Caltex Limited financial report,
inventory gained rose from US dollars 54/bbl 2016 to US 64/bbl 2017. The disadvantage of
using LIFO, revenue tends to be lower than after tax. This will lead to misallocation of funds
and high cost of purchasing goods. Since, all cost will be assigned to goods sold. All old cost
incurred remains in inventory. Weighted was not suitable for Caltex to use since inventory
will be lower compared to FIFO methodology. Calculation is done when units sold in
addition with ending inventory. Weighted average method heavily depends on average cost
per unit sold.