Dr. Hesham Mokhiemer

Global Distinguished Trainer · IFRS · Financial Modelling · Power BI · CMA Prep

Founder of The Financeer Academy. This lesson is excerpted from the IAS 2 Inventories module inside DipIFR Masterclass — the same depth and worked-example teaching style used across all 30+ IFRS standards in the full programme.

Most finance teams know the textbook line: "inventory is valued at the lower of cost and net realisable value." But ask them to define cost precisely — purchase price plus what, exactly? — and the answers start to diverge. This lesson walks through exactly what IAS 2 requires you to include when measuring the cost of inventory, with the normal capacity rule that trips up almost every finance team the first time they apply it.

IAS 2 · Inventories Module 2 · Part 1 of 2

Live Course Excerpt

From the DipIFR Masterclass curriculum

Cost of Inventory — What IAS 2 Requires You to Capitalise

Taught by Dr. Hesham Mokhiemer

What Is "Cost of Inventory"? — IAS 2.10

IAS 2 paragraph 10 sets the core principle in one sentence: the cost of inventories shall comprise all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. Three categories. Every cost you capitalise into inventory has to fit into one of them — and just as importantly, every cost that doesn't fit gets expensed immediately (which is exactly what Part 2 of this module covers).

Costs of Purchase — IAS 2.11

This is the most intuitive category, but it has more components than most people initially list. Costs of purchase comprise:

Costs of Conversion — IAS 2.12

For manufactured inventory, you also have to capitalise the cost of turning raw materials into finished goods. This has two components:

The Normal Capacity Rule — IAS 2.13

This is the single most important — and most frequently misapplied — rule in this entire module. Fixed production overheads must be allocated to units of production based on the normal capacity of the production facilities — not on actual output.

Notice what happens in the high-production scenario: the actual fixed overhead rate per unit decreases (because the same fixed cost is spread over more units) — IAS 2.13 explicitly permits this. The rule exists specifically to prevent abnormally low production periods from inflating inventory values above their real cost.

Other Costs Includable — IAS 2.15

The third bucket is deliberately narrow. Other costs are only included in the cost of inventories to the extent that they are incurred in bringing the inventories to their present location and condition. IAS 2 gives one example: costs of designing products for specific customers can be included if directly attributable. Beyond that narrow test, most "other" overhead-type costs are explicitly excluded — which is exactly what Part 2 of this module covers in full.

Worked Example — Al-Sahra Manufacturing Co.

Al-Sahra Manufacturing imports raw plastic resin from South Korea to produce packaging components at its Jeddah facility.

Continue Your IFRS Journey

This lesson is one part of a structured, 30+ standard IFRS curriculum. If the teaching style and depth here is what you're looking for, here's where to go next:

Dr. Hesham Mokhiemer

Global Distinguished Trainer · Founder, The Financeer Academy · the-financeer.com

Dr. Hesham Mokhiemer is the founder of The Financeer Academy. He has 25+ years of experience delivering IFRS, financial modelling, and exam preparation training to finance professionals across Saudi Arabia and the GCC — and personally teaches every module in the DipIFR Masterclass and IFRS CERT Course curricula.