Part IV

VTI Vintage Berhad manufactures tile. The amount of inventory in the statement
of financial position for the company consists of raw materials, work in progress and
finished goods. The inventories is valued at the lower of the cost and net realizable value.
There is an illustration shows a following:
The company has 250,000kg of cements which is cost RM45,000 in the warehouse in the
end of the year. The selling price of 10kg cements is RM2. The net realizable value
(NRV) of the 250,000kg cements is (250,000/10)kg x RM2=RM50,000. Therefore, the
amount of the 250,000kg cements should be record at the cost of RM45,000 since the
cost is lower than the amount of NRV(RM50,000).
Since the company is a manufacturing company, the cost of inventory is the cost
of conversion which comprises of direct material, direct labour and attributable
production overhead. In the order to calculate the cost of tiles in work in progress, it need
to identify the proportion of direct material, direct labour and overhead has been used in
the work in progress. The illustration to calculate the cost of 100 tiles in work in progress
as following:
The cost of 100 unit finished goods (tiles) is calculated as below:
Direct material RM 50
Direct labour RM100
Attributable production overhead RM100
RM250
The proportion of the factor used in the work in progress:
Direct material 100% complete
Direct labour 60% complete
Attributable production overhead 70% complete

Therefore, the cost of 100 unit of tile in work in progress is:
Direct material RM50 x 100% RM 50
Direct labour RM100 x 60% RM 60
Attributable production overhead RM100 x 70% RM 70
Total WIP value RM180

The attributable production overhead is allocated based on normal capacity of
production. For example, VTI Vintage Berhad budgets shows that the normal capacity of
production is the company will manufacture 500,000 units of tiles. The budgeted
attributable production overhead is estimated at RM 2 million. Therefore,
Pre-determined attributable overhead allocation per unit
= RM 2,000,000 / 500,000 units
= RM 4 per unit
During the end of the year 2011, the actual units produced were only 400,000 units which
is below the normal capacity of production, and the actual overhead incurred was RM 2
million per year. In this scenario, the attributable production overhead per unit should not
be increased. It should be based on the normal capacity of production.
Total attributable production overhead allocation for year 2011
= RM 4 x 400,000 units
= RM 1,600,000
RM 400,000 (RM 2,000,000 RM 1,600,000) that was not allocated is expensed off in
the Statement of Profit or Loss in the year end of 2011.
In year 2012, the actual production was 800,000 units which is higher than the
normal capacity of production and the actual overhead was RM 2 million per year. In this
scenario, the attributable production overhead should be based on actual production. This
is to ensure the cost of inventory do not higher than the actual cost incurred.

Attributable production overhead allocation per unit = RM 2,000,000 / 800,000 units
= RM 2.50 per unit
Total attributable production overhead allocation for year 2012
= RM 2.50 x 800,000 units
= RM 2,000,000
Next, this is the illustration which shows write-down of the inventory from cost to
net realisable value. In the statement of financial position of VIT Vintage Company, it
shows that the cost of inventory (tiles) are RM 600,000. When the manager doing annual
stock count, he found that there are RM100,000 of tiles were obsolete include in the RM
600,000of tiles. The RM100,000 of tiles could be sold as spare part at an estimate net
realisable value of RM 40,000. Therefore, the cost of inventory require to revalue as
follow:
Inventory at cost RM 600,000
Less: write down to NRV of obsolete tiles
( RM 100,000 RM 40,000) RM (60,000)
Revised inventory value RM 540,000
The cost of sales is reduced by the revised inventory value. The revised inventory
value will carried forward to the next accounting period in order to match the revenue
from sale of spare parts.