(a) IAS 2 requirements
Overheads
The Standard requires inventories to be measured at the lower of cost and net realisable value. The term “cost” includes “cost of conversion” (where appropriate). “Cost of conversion” includes “the systematic allocation of fixed and variable production overheads”. Fixed production overheads are indirect costs of production that remain relatively constant regardless of the volume of production (e.g. depreciation and maintenance of factory buildings and equipment, and the cost of factory management and administration). Fixed production overhead per unit must be based on the normal level of activity.

Lower of cost and net realisable value (NRV)
Inventories are usually written down to NRV on an item by item basis. In some circumstances it may be appropriate to group similar or related items.

Identification of costs
Specific identification of costs is inappropriate where there are large numbers of items which are ordinarily interchangeable. The cost of such inventories should be assigned by using the first-in, first-out (FIFO) or weighted average cost formulas.

(b) Disclosure requirements of IAS 2

• Accounting policies used in measuring inventories including the cost formula used.
• The total carrying amount and the carrying amount in appropriate classifications.
• The carrying amount of inventories carried at net realisable value.
• The carrying amount of inventories pledged as security for liabilities.