Evaluation of Inventory and Costing Method of Wesfarmers Company

Essay
Introduction
In Australia, Australian accounting standard board provides various guidelines for presentation
and preparation of accounting records. Some of those guidelines are notified as standards and
known as AASB. This essay is written for making analysis regarding the Wesfarmers
Company’s inventory and costing method. This essay will evaluate the inventory measurement
system applied by the company, advantage of such system and costing method applied by the
company. In addition to this, the essay will explain the impact of various costing method on the
financial results of the organization.
Evaluation of inventory measurement by the Wesfarmers Company
AS per AASB 102 inventories, inventory measurement must be made by the organization by
using cost or net realizable value whichever is lower as the value of inventory (Australian
Accounting Standards Board 2015). Cost is a value which incurred by the organization in
purchasing the inventory as well as another cost. Another cost is a cost which involved in
making the inventory in the state in which inventory remains on the closing date of the financial
period. Net realizable value of inventory is a value which is expected to receive by the
organization by selling the inventory in the market.
In the Wesfarmers organization inventory is valued at lower of cost or net realizable value. The
company expects net realizable value on the basis of the normal selling price of company’s
product in the market. Cost is measured by the organization on the basis of the purchased cost.
The organization applies judgments and assumptions in making calculations regarding the net
realizable value. Such assumptions are also reviewed by the organization yearly basis.
Inventory system applied by Wesfarmers
Wesfarmers organization use perpetual inventory system. The company maintains the cost of
sales account and does not maintain purchases account. Wesfarmers Company is a big company
whose business is spared globally and out of the limits of the country. Hence Wesfarmers
Company requires maintaining inventory records on the real-time basis. Perpetual inventory
system provides the facility of inventory management on the real-time basis (Deegan 2016).
In addition to this perpetual inventory system is a more innovative method. It is helpful in
maintaining the better inventory related internal controls. This system is helpful in the reduction
of inventory misstatement and inventory theft. Hence this is the most suitable system for the big
company like the Wefarmers Inc. hence it can be concluded that company chooses the best
inventory system available for the inventory recording.
Inventory cost system applied by Wesfarmers

Inventory cost system applied by the Wesfarmers is the weighted average method. Wesfarmers
Company values its raw martial inventory at purchase cost by using the weighted average
method of inventory valuation (Wesfarmers 2017). Company values the finished goods and work
in progress inventory on the basis of cost involved for the inventory except borrowing cost or net
realizable value whichever is lower (Wesfarmers 2017). Moreover, merchandise goods of the
company also valued at cost involved for the inventory except borrowing cost or net realizable
value whichever is lower by using the weighted average method of inventory valuation
(Wesfarmers 2017).
Advantages of weighted average inventory system
The weighted average inventory system is a simple and most appropriate system under this
system inventory valued on the basis of weighted average inventory cost. Weighted average
inventory cost is calculated by dividing total inventory cost during the period by the total
quantity purchased during the period. Under this inventory system, cost of inventory sold is also
calculated on the basis of weighted average inventory cost. Some advantages of this system are,
1. This system ensures the lower price fluctuation in the inventory cost due to frequent
smaller changes in the inventory cost. This system ensures the consistency of the
inventory cost.
2. This system does not require extensive paperwork for the bookkeeper because under this
system bookkeeper needs to calculate the average cost of inventory at ones and need to
use such average cost during the whole financial period. This inventory system does not
require keeping each record of previous purchases at the time of each sale and inventory
valuation made by the organization.
3. This method is more simple then the other alternative methods of inventory valuation i.e.
first in first out method, last in first out method and specific identification method
(Brooks 2015).
4. This inventory system is best for the industry in which inventory units are inseparable
and cannot distinguish on the basis of purchase batches. For example for a petroleum
production organization, it is impossible to distinguish the various batches in which non-
purified batches were purchased by the organization. Hence this method takes all cost
into consideration by averaging them. Hence this is much better than other systems.
5. This method is accepted by the AASB 102 as well as IFRS hence this is a globally
acceptable system (Wild 2017).
Impact of different costing methods on financial statement
Inventory costing system majorly impacts the two financial statements i.e. statement of financial
position and statement of financial performance. Impact of various inventory systems on these
financial statements are explained below,