Introduction

The acquisition cost of inventory is a critical element in accurately measuring a company’s financial position and operating performance. With increasing global supply chain complexity and raw material price volatility in 2024, accurate determination of acquisition costs has become more important than ever. K-IFRS (Korean International Financial Reporting Standards) clearly defines inventory acquisition costs to enhance comparability between companies.

Learning Objectives:

1. Systematic understanding of inventory acquisition cost components and calculation methods
2. Development of practical application skills for various acquisition cost calculation methods
3. Mastery of accurate accounting treatments and disclosure requirements under K-IFRS

Basic Concepts of Inventory

Definition of Inventory

Inventory comprises assets:

• Held for sale in the ordinary course of business (merchandise, finished goods)
• In the process of production for sale (work-in-progress, semi-finished goods)
• Materials or supplies to be consumed in the production process or rendering of services

Key Terms and Definitions

1. Inventory

• Assets held for sale in normal business operations
• Including materials to be used in production
• Including costs of unfinished services for service companies

1. Acquisition Cost

• Purchase cost, conversion cost, and other costs incurred in bringing inventory to its present location and condition
• Excludes abnormal costs

1. Purchase Cost

• Purchase price, import duties, transport costs directly related to inventory acquisition
• Deducting purchase discounts and rebates

1. Conversion Cost

• Direct labor costs and manufacturing overhead related to production
• Allocated based on normal operating capacity

1. Profit or Loss for the Period

• Income items directly related to inventory valuation
• Valuation losses and reversals recognized in the period incurred

💡Key Summary: Inventory acquisition cost consists of purchase cost, conversion cost, and other costs, which directly impact a company’s financial position and performance.

Classification and Characteristics of Inventory

1. Merchandise and Finished Goods

[Distinction between Merchandise and Finished Goods]
1. Merchandise
- Purchase Purpose: For resale
- Cost Components: Purchase cost + Incidental expenses
- Characteristic: No form transformation

2. Finished Goods
- Purchase Purpose: Manufacturing for sale
- Cost Components: Manufacturing cost
- Characteristic: Raw material transformation required

2. Work-in-Process and Semi-finished Goods

[Differences between WIP and Semi-finished Goods]
1. Work in Process
- Progress Stage: Under manufacturing
- Salability: Not possible
- Cost Calculation: Equivalent units required

2. Semi-finished Goods
- Progress Stage: Intermediate completion
- Salability: Possible
- Cost Calculation: Independent costing

Accounting Treatment of Acquisition Cost

1. Basic Purchase Cost Entry

[Basic Purchase Transaction]
(Dr) Merchandise 10,000,000
(Cr) Cash 10,000,000
- Basic entry for merchandise purchase

[Incidental Expenses]
(Dr) Merchandise 500,000
(Cr) Accounts Payable 500,000
- Entry for transportation costs

2. Treatment of Purchase-related Expenses

[Complex Transactions]
(Dr) Merchandise 12,000,000
     Input VAT 1,200,000
(Cr) Accounts Payable 13,200,000
- Transaction including VAT

[Discount Application]
(Dr) Accounts Payable 132,000
(Cr) Purchase Discount 120,000
     Input VAT 12,000
- Cash discount application

Special Cases in Acquisition Cost Calculation

1. Foreign Currency Transactions

When purchasing inventory in foreign currency, the acquisition cost is converted to local currency using the exchange rate at the transaction date.

[Foreign Currency Transaction Example]
(Dr) Merchandise ($10,000 × ₩1,200) 12,000,000
(Cr) Foreign Accounts Payable 12,000,000
- Merchandise purchase in dollars

Manufacturing Cost Components

1. Direct Costs

• Direct materials: Raw materials directly used in production
• Direct labor: Wages of workers directly involved in production

2. Indirect Costs

• Factory supervision costs
• Depreciation
• Repair and maintenance
• Factory insurance
• Factory utilities

💡Key Summary: Manufacturing costs comprise direct and indirect costs, each appropriately allocated per product unit.

Items Excluded from Acquisition Cost

1. Abnormal Losses

• Abnormal waste of materials
• Inefficient labor costs
• Excessive transportation costs

1. Administrative Expenses

• General administrative expenses
• Selling expenses
• Research and development costs

1. Finance Costs

• Interest on borrowings for inventory acquisition
• Exception possible for qualifying assets

Practical Application Considerations

1. Cost Allocation Methods

• Specific identification: Individually identifiable costs
• FIFO: First-in, first-out assumption
• Weighted average: Using average unit cost

2. Disclosure Requirements

1. Inventory valuation basis
2. Book value and net realizable value
3. Inventory amounts recognized as expenses
4. Inventory valuation losses and reversals

Conclusion and Next Steps

Inventory acquisition cost forms the foundation of cost management and profitability analysis, with accurate calculation and treatment directly affecting financial statement reliability.

Summary Table

Category	Included Items	Excluded Items	Characteristics
Purchase Cost	Purchase price, duties, freight	Abnormal losses, admin expenses	Direct attribution cost
Conversion Cost	Direct labor, manufacturing overhead	Sales-related expenses	Production-related cost
Other Costs	Design, processing costs	Administrative losses	Incidental costs