Assumptions that must be made in order to assign a cost to inventory items at the time of sale
One of the major problems in accounting for inventory is assigning the cost of acquiring inventory between those items sold during the year and those items still on hand at the reporting date. Ideally, costs should be individually identified for each inventory item however, this is only practical for entities whose inventory consists of a small number of easily identifiable items such as art galleries or manufacturers of specialized equipment.
Where a specific cost cannot be identified because of the nature of the item sold then some method has to be adopted to estimate that cost. This process is known as “assigning” cost. Most inventory items fall into this category, for example, identical items of food and clothing and bulk items like oil and minerals. How can you measure the cost of a tonne of wheat when it is extracted from a stockpile consisting of millions of tonnes acquired at different prices over the accounting period? There are many method of assigning a cost to inventory items sold but IAS 2 paragraph 25 restricts entities to a choice between two methods – FIFO and weighted average.