Common U.S. GAAP Issues Facing Accountants, 2nd Edition

Chapter 7Inventory

Learning objective

• Identify accounting principles and reporting practices applicable to inventory.

Overview

FASB Accounting Standards Codification^® (ASC) 330, Inventory, addresses accounting principles and reporting practices applicable to inventory. A major objective of accounting for inventories is the proper determination of income through the process of matching appropriate costs against revenues.

FASB ASC 330 applies to all entities with inventory, but does not necessarily apply to the following entity types:

• Not-for-profit entities (NFPs)
• Regulated utilities

Initial measurement

The primary basis of accounting for inventories is cost, which has been defined generally as the price paid or consideration given to acquire an asset, including the applicable expenditures and charges directly or indirectly incurred in bringing the inventory to its existing condition and location. Therefore, determining the initial cost of inventory, which includes both its acquisition and production cost, involves several considerations, such as the allocation of costs and changes to inventory items that are at various stages of completion (known as work in process), or in a state of finished goods. For example:

• Variable production overheads (budgeted) are allocated to each unit of production on the basis of the actual use of the production facilities. These costs change with the production of unit of output, for example, indirect material or indirect labor because they ...