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 | January 2017 and was increased to €300 per tonne on 1| July 2017 and remained constant from then on until the end of the year, 31 December 2017. 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 2017 will continue during 2018.

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

(a) Calculate the value of inventory at 31 December 2017 on a basis acceptable under IAS 2 Inventories.

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