FAR M8- Inventory参考.doc

Study Notes- FAR M8 (Inventory) Classifications of Inventory For a manufacturing company there are three different classifications of inventory. These are: Raw materials Work-in-progress Finished goods For CPA FAR exam, the focus is on the accounting for finished goods. The production process and the allocation of costs in the production process are covered in the material on BEC. What should be included in the inventory costs? All costs necessary to prepare the goods for sale Purchase price of the goods Freight-in (freight-out is considered as selling expenses except consignment situation as discussed below) Normal handling costs, spoilage and warehousing costs Fixed overhead allocated based on the normal capacity of production facilities Abnormal costs including the unallocated fixed overhead costs due to low utilization of capacity should be excluded from inventory cost. Goods in transit Goods in transit are goods that have been shipped prior to ye ar end, but have not yet been received by the buyer. To whom the goods belong is determined by the terms of shipping. FOB Shipping Point- belong to the buyer from the moment that the seller gives them to the shipping company. This means that while the goods are in transit they belong to the buyer. This is because title was transferred at the shipping point. FOB Destination-belong to the shipper until the buyer receives them. This means that while the goods are in transit, they belong to the seller and title is transferred at the destination point only when they are received by the buyer. Consignment goods Consigned goods are given by one company (the consignor) to another company (the consignee) for that second company to sell to the end consumer. This is done because the consignee is physically closer to the consumer or it enables the consignor to get a wider distribution of goods than the company could achieve on its own. The main issue is that when goods are consigned, ownership never transfers to the