IFRS for SMEs) IFRS for SMEs Inventory and Cost 2 — Questions and Answers
Question 1: Under IFRS for SMEs, which method is used to allocate fixed production overhead to inventory?
- Based on normal capacity of production facilities (Correct answer)
- Based on actual output each period
- Based on maximum capacity
- Not allocated; expensed directly
Correct answer: Based on normal capacity of production facilities
Fixed production overheads are allocated based on normal capacity, not actual production, to avoid distorting unit costs in low-output periods.
Question 2: An SME entity holds raw materials, work-in-progress, and finished goods. Under IFRS for SMEs, the lower of cost and NRV test applies to:
- Each category or line item of inventory (Correct answer)
- Only finished goods inventory
- The aggregate of all inventories combined
- Only raw materials
Correct answer: Each category or line item of inventory
IFRS for SMEs requires the lower of cost and NRV assessment to be applied on an item-by-item basis or for similar categories.
Question 3: Under IFRS for SMEs, borrowing costs on funds used to finance inventory held for sale should be:
- Recognized as an expense when incurred (Correct answer)
- Capitalized into the cost of inventory
- Deferred and amortized over the expected selling period
- Offset against related revenue
Correct answer: Recognized as an expense when incurred
IFRS for SMEs requires all borrowing costs to be recognized as an expense; capitalization of borrowing costs is not permitted.
Question 4: When an SME uses a standard cost method for measuring inventory, what condition must be met for it to be acceptable?
- The standard costs must approximate actual cost (Correct answer)
- Standards must be set annually
- It is only permitted for raw materials
- It must be approved by external auditors
Correct answer: The standard costs must approximate actual cost
Under IFRS for SMEs, standard costs are an acceptable inventory cost technique provided they approximate actual cost.
Question 5: Under IFRS for SMEs, service providers that hold inventories should measure those inventories at:
- Costs of production, primarily labor and other costs of personnel directly engaged in providing the service (Correct answer)
- Market selling price less normal profit margin
- Direct material cost only
- Fair value less costs to complete
Correct answer: Costs of production, primarily labor and other costs of personnel directly engaged in providing the service
For service providers, inventory costs consist mainly of the labor and other costs of personnel directly engaged in providing the service, including attributable overheads.
Question 6: Under IFRS for SMEs, which of the following would be a period cost rather than a product cost for inventory purposes?
- Selling costs (Correct answer)
- Direct labor on production
- Import duties on raw materials
- Factory supervisor wages
Correct answer: Selling costs
Selling costs are excluded from inventory cost and recognized as period expenses under IFRS for SMEs Section 13.
IFRS for SMEs) IFRS for SMEs Inventory and Cost 2
Under IFRS for SMEs, which method is used to allocate fixed production overhead to inventory?