4.4 Using Mark-up ／ Margin Percentages to Establish Cost

The purchase cost， gross profit and selling price of goods may be shown as：

When shown as a fraction or percentage of the cost price， the gross profit is known as the mark-up ．

When shown as a fraction or percentage of the selling price， gross profit is known as the margin ．

Margin and mark-up can help us to establish the cost of an item of inventory． It is also common to establish standard gross profit percentages in relation to cost to set the sales price，for example：

·Inventory that cost ￡ 120 may be sold at a margin of 40％， so the sales value is ￡ 120×100 ／60 ＝ ￡ 200， and the profit is ￡ 120×40 ／60 ＝ ￡ 80.

·Inventory that cost ￡ 120 may be sold at a mark-up of 40％ to reach a sales price of￡ 168 （120×140 ／100）．

These standard percentages can be set out as listed in Exhibit 4.15， using the above as an example：

Summary

·IAS 2 Inventories lays out the required accounting treatment for inventories under International Financial Reporting Standards．

·Inventories include assets held for sale （ finished goods）， assets in the production process for sale （work in process）， and materials and supplies consumed in production （ raw materials）．

·The cost of goods sold is calculated as： opening inventory ＋ purchases／ production －closing inventory．

·The quantity of inventories held at the year end is established by means of a physical count of inventory in an annual counting exercise， or by a‘continuous’ inventory count．

·The value of inventories is calculated at the lower of cost and net realisable value（NRV） for each separate item or group of items．

·Cost of inventory includes costs of purchase， costs of conversion and other costs incurred in bringing the inventories to their present location and condition．

·NRV is the expected selling price， less any costs still to be incurred in getting the inventory ready for sale．

·For items that are interchangeable， IAS 2 allows first in， first out （FIFO） or weighted average costing （AVCO） methods to value inventories．

·Margin and mark-up can help us to establish the cost of an item of inventory． khYnU4v3jgr5xC0rLh7Swyx5ZqJT/2TZvvUdXJPBjYzfutM3kqOO466ymnw4dIMG