Background: Mr David Buttoner the owner operator of Buttons by David Pty Ltd. runs a number of button lines. His favourite is a cut stag horn button that has gold filigree. Using a variable costing approach, the revenues and costs per 100 buttons is: Table 1: Stag Horn Button Costs per 100 Buttons
Sales Revenue $200.00 VC of materials — Stag horn $40.00 — Gold wire 50.00 $90.00 VC of labour — Cutting $ 5.00 — Wire inlay 35.00 — Polishing 8.00 48.00 VC of MO/H — Indirect Materials $ 2.00 — Indirect Labour 5.00 — Other MO/H 15.00 22.00 VC of SG&A 5.00 $165.00 Contribution Margin $ 35.00 FC of MO/H $ 100.00 FC of SG&A 25.00 $125.00 Profit/(loss) before Taxes ($90.00)
However, that line is not popular with the customers and generates a substantial loss for the company. The stag horn button inventory has built up over the past year to 30,000 buttons. Required: As the External Auditor and using a standard format memo (i.e. a short report of 1/2 to 1 1/2 pages) please explain to Mr David Buttoner: 1) Whether the staghorn inventory meets the definition of an Inventory (cite the AASB Handbook section), 2) The current full absorption amount of the staghorn button inventory in the Books of Account.
3) Why and by how much the staghorn inventory needs to be written down (please justify the write down; e.g. the Lower of Cost or Market; cite the AASB Handbook section; and show calculations to justify your amount). This is to be answered in your groups of 3 6 students, where each group will submit one report with the names and student numbers of all group members in the heading. The assignment is due 14 May/14, in class.
NB: you need to identify the key question and to reorganise the rest of the memo to resolve that question.