Rio Tinto's Inventory Valuation and Costing Method

Running Head: Essay 0
BUSINESS ACCOUNTING
MAY 28, 2018

Essay 1
The company Rio Tinto being a reporting entity as per the Australian Corporations Act 2001,
is required to follow AASB 101 on Presentation of Financial Statements and AASB 102 on
Inventories.
Q.1.
The inventory has to be presented as a line item in the Statement of Financial Position
(AASB, 2015a). According to AASB 102, inventories must be valued at cost or net realisable
value, whichever is lower. And hence, Rio Tinto’s inventories are also valued at lower of cost
or NRV. The computation of average costs is done with regards to the cost of opening
inventory and the various monthly cost levels. As stated in the Annual Report of Rio Tinto
for 2017, the breakup of inventory costs of Rio Tinto is described in the following segment.
The raw materials and the consumable stores are valued at the purchase price (Rio Tinto,
2018). Purchase price includes import duties, irrecoverable or out of own pocket taxes,
transportation charges and other costs directly relatable to the acquisition (AASB, 2015b).
The cost of partially processed and ready for sale products is the cost of production price (Rio
Tinto, 2018). Cost of production is comprised of three components. The first component is
the direct costs such as labour charges, material costs in relation to ore extraction and
processing; and the production of alumina and aluminium. Next component is the
depreciation charged with respect to mining properties, leases and property, plant and
equipment. Last component is the production overheads. Stockpiles of ore comprise the work
in progress, the costing of which depends on the degree of certainty for processing. If there is
a significant uncertainty of processing, it would be charged to mining expenses and if the
certainty can be predicted, it would be valued at lower of cost or the net realisable value (Rio
Tinto, 2018). In case, the ore is not to be processed till 12 months from date of statement of
financial position, it would be classified as a noncurrent asset, the NRV of which is
calculated on discounted cash flow basis.

Essay 2
Q.2.
The inventory system applied in the chosen company is perpetual inventory system. The most
striking feature of the perpetual inventory system is that the balances of inventory and cost of
goods sold are readily available at a single click unlike in case of periodic inventory system
where inventory counting exercise is done only at the end of the particular accounting period.
In order to survive in a competitive business environment procurement of timely and accurate
information is very crucial and therefore, it is best suited for a large company like Rio Tinto
where the physical tracking of inventories would be cumbersome. This in turn results in
better control of inventory from the management’s point of view (Waller and Esper, 2014).
The system not only prevents situation where products are out of stock but also allows large
business houses as that of Rio Tinto to centralize the inventory management system for
multiple locations in different geographical areas.
Q.3.
The costing method adopted by Rio Tinto is weighted average costing basis (Rio Tinto,
2018). The benefit of adopting the weighted average costing method is that it is best suited in
the perpetual inventory system where the unit cost of inventory is determined with respect to
each sale (Warren, Reeve and Duchac, 2017). The reason why the company has chosen this
method is that AASB 102 requires weighted average cost method to be used to compute the
average cost (Horngren, et al., 2012). Moreover it most accurately presents the cost of
inventory in hand and also the cost of goods sold. Thus it is the most balanced approach as
compared to the other costing methods. In weighted average cost method, computation of
cost is done by dividing the total cost of goods in relation to goods available for sale by the
total units (Kinney and Raiborn, 2011). Moreover it also takes into account the cost of