Inventory, Costing & Financial Statement Impact: Motorcycle Holdings

This essay provides a comprehensive analysis of Motorcycle Holdings Limited's inventory management and costing methods, aligning with Australian Accounting Standards, particularly AASB 102. It evaluates the company's inventory measurement practices, highlighting the use of 'writing dow...Read More

Running head: MANAGERIAL ACCOUNTING
Managerial Accounting
Name of the Student
Name of the University
Author’s Note

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Introduction
The study has covered the different methodologies available for measurement of
inventory which are considered by Motorcycle Holdings Limited. The study has further
discussed about various aspect of inventory and how the compliance of relevant recognition of
the same has been conducive for the company. This section of the study has included the
application of the relevant costing system applicable for Motorcycle Holdings Limited. The final
part of the study has identified the relevant costing method as per the inferences made from the
financial report of the company.
Evaluation and measurement of inventory as per relevant standard
Typically, the Australian entities are seen to follow “Accounting Standard AASB 102
Inventories” which is recognised as the relevant application of pertinent standards for
inventories. This accounting standard is appropriate with accounting for inventories based on the
carrying value included with the related revenue. The applicable standard, also acts as a guidance
for evaluating the relevant cost and revenue for recognition of the expenses. “AASB 102
Inventories” is considers writing down the net realizable value. The relevant accounting
standard for the entities provides the appropriate guidelines which is related to assigning cost of
the inventories. Based on this measure of valuing the inventory, the companies are able to
consider the expenses which are to be written down from the values of the inventories and
recognised at the time revenue were recognised. However, it is also important to consider that
such a standard will not be applicable to instruments like “AASB 132 Financial Instruments”
and “AASB 9 Financial Instruments” (AASB 2015).

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Inventory system followed by Motorcycle Holdings Limited
The adoption of relevant measurement for the inventory for Motorcycle Holdings
Limited has been seen to be applicable with “Accounting Standard AASB 102 Inventories”.
The relevant issue with the application of such an accounting standard has been seen to be based
on the various types of factors which are associated with appropriate treatment of inventory for
the company. By referring to appendix 1, the inventory estimation has considered use of
“writing down the inventory to net realisable value”. This is directly relevant to measuring the
inventory as per “Accounting Standard AASB 102 Inventories”. The reason for such an
assertion can be determined with applying weighted average method. Additionally, the net
realisable value of inventory is depicted selling price in the normal course of business and
subtraction of the same (Sorrentino 2017).
By referring to appendix 2, it can be clearly discerned that the carrying amount of the
new motorcycles are inferred with “lower of cost or net realisable value”. Moreover, the cost
pertaining to the inventory will be applied as per lower of cost and net realisable value. In a
similar manner Motorcycle Holdings Limited measures, the carrying value of the used
motorcycle as per lower of cost and total realisable value of the inventory on a unit by unit basis.
Moreover, the main parts of the motorcycle are taken into account as per taking the cost assigned
to the individual components based on weighted average cost system. This is evident by referring
to appendix 3 (Akdogan and Ozturk 2015).
Costing method applied by Motorcycle Holdings Limited
As per the consolidated income statement of Motorcycle Holdings Limited, it may be
inferred that the company has followed traditional method for the classification of the categories
which allocated as per direct material, direct labour and overhead. As per the carrying value of

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the company the overall cost of the self-constructed asset includes significant portion of the
aforementioned costs. This type of costing system is evident with assessment of the allocating
the corporate overhead and assets to the relevant CGU by the comparison of relevant allocation
methodology (Ahmed and Ali 2015). Moreover, such a consideration of cost can be inferred with
traditional costing approach instead of ABC system. The appropriate method for adoption of
such a costing method can be inferred with inclusion of overhead cost in its EBIT. Furthermore,
the adoption of such costing shows the possibility of recovery during a short-term sale as a result
of service arrangement. Motorcycle Holdings Limited is identified to allocate such under central
overhead which needs to include as per cost of continuing operations (Steele 2015).
Effect of applying different costing method in the financial statement of Motorcycle
Holdings Limited
As the company is seen to be using traditional method of costing, it needs to be discerned
that significant cost will include the cost associated with manufacturing motorcycle parts. In
addition to this, the indirect expenses will include the assumptions based on disposals,
impairment expense, depreciation expense and amortisation expense (Act 2017). Additionally,
the consideration of overhead cost may cause significant inaccuracies in the balance sheet as per
the assertions of direct cost. The traditional costing system considers dividing total cost of
products as per an amount of direct labour cost. The important issue pertaining to this may be
seen with incorrect assertion of manufacturing process related to loss of money (Parle, Joubert
and Laing 2017).
The indirect cost included by the company can be evident with maintenance cost and
machine setup cost. However, it is possible that the company prefers traditional costing due to
simplicity of cost evaluation. The implementation of ABC system will be essential in solving
different problems which are depicted with inaccurate traditional costing method. The

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application of ABC costing will enable a company to assign the cost depicted with
manufacturing in-house products (Loyeung and Matolcsy 2015).
Conclusion
The depiction of measurement of inventory is relevant as per the standard of
“Accounting Standard AASB 102 Inventories”. Such an accounting standard is relevant with
accounting for inventories based on the carrying value included in the related revenue. The
applicable standard acts as a guidance for evaluating the relevant cost and revenue for the
recognition of the expenses. AASB 102 Inventories is also helpful in writing down the net
realizable value. Motorcycle Holdings Limited involves in inventory estimation with writing
down the inventory value to net realisable value. It can be seen that implementation of ABC
system will be essential in solving different problems of traditional costing method.

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References
AASB, C.A.S., 2015. Investment Property.
Act, C.C., 2017. ANNEXURE A.
Ahmed, K. and Ali, M.J., 2015. Has the harmonisation of accounting practices improved?
Evidence from South Asia. International Journal of Accounting & Information
Management, 23(4), pp.327-348.
Akdogan, N. and Ozturk, C., 2015. A Country Specific Approach To IFRS Accounting Policy
Choice In The European, Australian And Turkish Context. EMAJ: Emerging Markets
Journal, 5(1), pp.60-81.
Loyeung, A. and Matolcsy, Z., 2015. CFO's accounting talent, compensation and
turnover. Accounting & Finance, 55(4), pp.1105-1134.
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).
Sorrentino, M., 2017. Towards a Full Accrual Accounting in the Public Sector: A Critical
Analysis of IPSAS 12. International Business Management, 11(12), pp.2196-2202.
Steele, N., 2015. Accounting: Get the numbers right. Company Director, 31(5), p.41.

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List of Appendix
Appendix 1
Appendix 2
Appendix 3

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