Micro Limited processes and sells a single product. Purchases of raw materials during the year were made at a regular rate of 1,000 tonnes at the beginning of each week. The price was €200 per tonne on 1 January 200X and was increased to €300 per tonne on 1 July 200X and remained constant from then on until the and of the year, 31 December 200X.

In addition to this price a customs duty of €20 per tonne was paid throughout the year and transport from the docks to the factory cost €40 per tonne.

Variable costs of processing were €50 per tonne. There was capacity to process 1,000 tonnes per week and the fixed production costs for all levels of activity up to this capacity level were €60,000 per week. One tonne of raw materials is processed into one tonne of finished products and sold, at a delivery price of €480 per tonne, by a sales force whose cost was fixed at €6,000 per week. Average delivery costs to customers were €15 per tonne. %

At the beginning of the year there was no inventory and at the end of the year there were 5,000 tonnes of raw material and 2,000 tonnes of finished product. It is expected that the costs and prices current at 31 December 200X will continue during 200Y.

Requirement Draft the accounting policy on inventory for the company to include in its financial accounts.

(a) Calculate the value of inventory at 31 December 200X on a basis acceptable under IAS 2 Inventories.

(b) Comment upon the relative merits of FIFO and any other basis recognised under IAS 2 for valuing inventory.

Note You should assume that inventories of raw material can only be used to produce finished goods and cannot be re-sold as raw material at a realistic price.

Note Assume a 52-week productive year with production and sales spread evenly throughout the year.