How Do You Answer Inventory Valuation Questions in ACCA FR?
Inventory questions in ACCA FR test IAS 2 — the lower of cost and net realisable value, and what to include in cost. Here's how to apply the rule and score the marks.
Inventory valuation questions in ACCA FR are built on IAS 2, and the central rule is simple to state but easy to misapply: inventory is measured at the lower of cost and net realisable value (NRV). The marks come from applying that rule correctly to the scenario and knowing exactly what belongs in cost.
What's included in cost?
- Purchase price, including import duties and non-recoverable taxes, less trade discounts.
- Conversion costs — direct labour and a systematic allocation of production overheads.
- Other costs incurred in bringing inventory to its present location and condition.
Excluded: abnormal waste, storage costs (unless necessary in production), selling costs and administrative overheads not related to production.
Net realisable value
NRV is the estimated selling price in the ordinary course of business, less the estimated costs to complete and the costs necessary to make the sale. Where NRV falls below cost — damaged goods, obsolete lines, falling prices — you write inventory down to NRV.
Apply it line by line
The lower-of-cost-and-NRV test is applied to each item or group of similar items, not to inventory as a whole. Watch the classic trap of offsetting a write-down on one line against a profit on another.
Practising full inventory questions and marking them against the official ACCA scheme with The 50% Club shows you exactly where your cost inclusions or NRV judgements are losing marks — the fastest way to make IAS 2 a reliable scorer.