The Green Ltd is an established company operating in the highly competitive business of manufacturing domestic appliances. It makes home and office furniture. The following are costs related to the make office:

Direct labour and materials 140

Bought-in components 60

Factory overhead costs 40

Royalty on sale payable 14

For 1000 offices, the other overhead costs are 21,000 made up as follows:

Salary and office costs of production director 6000

General office administration 5000

Selling and distribution costs 10000

The selling and distribution costs include a fixed commission of 6 per office payable to the salesmen.

The advertised selling price of this model has recently been reduced to 260 due to increased competition.

Required:

(a) IAS 2 Inventories states that the cost of inventory includes production overheads and other overheads. Explain the principle on which the inclusion of these costs is based and how these costs should be allocated to units of inventory.

(b) Calculate the unit value of closing inventory for the Green Ltd on the basis of IAS 2 Inventories. State any assumptions you have made.