Financial Accounting Financial Reporting FR

SIC-1 Consistency – Different Cost Formulas for Inventories

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SIC-1, or Standard Interpretation Committee Interpretation 1, is a guidance issued by the International Accounting Standards Committee (IASC) that provides guidance on the consistency requirement in accounting for inventories. According to SIC-1, an entity should use the same cost formula for inventories that have a similar nature and use in the ordinary course of business. However, there are circumstances where different cost formulas may be used for inventories, and SIC-1 provides examples of such situations. Here are some examples:

  1. Specific Identification Method: Under this method, each item of inventory is identified and recorded at its actual cost. This method is commonly used for items that are unique, expensive, or have specific serial numbers or batch numbers. For example, a car dealership may use the specific identification method for recording the cost of individual cars in its inventory, as each car has a unique cost.
  2. First-In, First-Out (FIFO) Method: FIFO assumes that the first items acquired are the first items sold or used. Under this method, the cost of the oldest inventory is matched with the revenue from the earliest sales. This method is commonly used when there is a flow of inventory that can be specifically identified, such as perishable goods or items with a limited shelf life. For example, a grocery store may use the FIFO method for recording the cost of fruits and vegetables, where the older inventory is sold first to avoid spoilage.
  3. Weighted Average Method: The weighted average method calculates the average cost of inventory by dividing the total cost of goods available for sale by the total quantity of goods available for sale. This method is commonly used when inventory items are not easily distinguishable, and it is not practical to track individual costs separately. For example, a hardware store may use the weighted average method for recording the cost of nuts and bolts, as it is not feasible to track the cost of each individual nut or bolt.
  4. Standard Cost Method: Under the standard cost method, inventory is recorded at a predetermined standard cost per unit, which is based on management’s estimate of the expected cost of producing or acquiring the inventory item. This method is commonly used in manufacturing industries where standard costs are established for materials, labor, and overhead. For example, an automobile manufacturer may use the standard cost method for recording the cost of various components used in the production of cars, where standard costs are established for each component.
  5. Retail Method: The retail method is often used by retailers to estimate the cost of inventory based on the retail selling prices and the markup percentage. The cost of inventory is calculated by subtracting the estimated markup from the retail selling price. This method is commonly used in the retail industry where inventory is sold at various price points with different markup percentages. For example, a clothing store may use the retail method for recording the cost of clothing items, where different markup percentages are applied based on the type of clothing.

In conclusion, SIC-1 allows for different cost formulas for inventories in certain situations, such as when the nature and use of the inventory items are different, or when specific industry practices are followed. It is important for entities to carefully consider and apply the appropriate cost formula for their inventories in accordance with relevant accounting standards and guidelines.

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