Accounting for Managers: Interpreting Accounting Information for Decision Making, 4th Edition

Chapter 8

Accounting for Inventory

Inventory is a crucial link between the Income Statement (as it affects the calculation of profit) and the Statement of Financial Position. However, it is also an important component of cost with which we are concerned throughout Part III of this book. Therefore, it is a useful bridging chapter on which to end our treatment of financial statements and lead into the use of accounting information for decision making, planning and control.

This chapter begins with an explanation of inventory as it relates to financial statements. It then looks at the alternative methods of inventory valuation (average cost and first in–first out) and then explains the two main costing systems used for inventory: job costing and process costing. The chapter also looks briefly at long-term contract costing for construction projects. The chapter also looks briefly at long-term contract costing for construction projects and concludes by looking at the management accounting statements for manufacturing businesses that are used by managers for internal decision making.

Introduction to inventory

Inventory (or stock) is the term used for goods bought or manufactured for resale but which are as yet unsold. Inventory enables the timing difference between purchasing or production and customer demand to be smoothed. The value of inventory according to IAS2 Inventories is the lower of cost and net realizable value.

The cost of inventory includes all costs of purchase, conversion ...