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Thread: Accounting for reverse assembly / revaluation of inventory

  1. #1
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    Accounting for reverse assembly / revaluation of inventory

    Does anyone know what is the correct way to account for a reverse assembly of a product.
    You buy a (finished product) machine into inventory at R100,000 consisting of multiple parts.
    You then strip down the machine into its various parts. For purposes of understanding, lets assume that the total number of parts are 20 parts. As you strip the parts you allocate them a cost. DR Parts Inventory and CR Machine Inventory. After 10 parts you have already reached the original value of the machine, however there are still another 10 parts on the machine that have a value and that need to be put into inventory.

    1)What would the correct accounting entries be for the revaluation of the inventory (ie the parts that have a value above the original value of the machine)?
    2)Once you have striped all parts from the machine how would you remove (accounting entries) the machine(stock unit) from inventory ?
    3)How would you account for all the costs related to the removal of the parts, ie would you capitalise this against the stock?

    I would appreciate any help in this regard.

  2. #2
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    Is this spares / maintenance inventory or inventory held for resale? Assuming the latter:

    You question(1). Remember valuation is the lesser of cost or net realisable value. So, there can be no revaluation, only impairment.

    Then, to answer the other questions, the key is to arrive at cost. I suggest a weighted average as follows:
    The cost of the completed machine = a
    The resale value of the components = b
    Unrealised profit, c = (b-a)
    Each component item at resale less c as a percentage of b will give weighted average cost.

    Strictly speaking you should do the same with the conversion cost; the cost of stripping and so on.

    This is from exposure draft of the IFRS:

    Cost of inventories
    12.4 An entity shall include in the cost of inventories all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

    Costs of purchase
    12.5 The costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.
    12.6 An entity may purchase inventories on deferred settlement terms. When the arrangement effectively contains a financing element, that element, for example a difference between the purchase price for normal credit terms and the amount paid, is recognised as interest expense over the period of the financing.

    Costs of conversion
    12.7 The costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and equipment, and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour.

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    Dave A (05-Feb-13)

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