Answer to Question #108306 in Accounting for michael

Question

Based on the Samsung 2018 Financial Statements

1) What is the inventory costing method used by Samsung? Is the method appropriate given what you know about Samsung's business or industry?

2) Explain the importance of the lower of cost and NRV as applied to Samsung's inventories, given what you know about its industry. Apply this to the incident in 2016 relating to its Galaxy Note 7.

Refer to: images.samsung.com/is/content/samsung/p5/global/ir/docs/2018_con_quarter04_all.pdf

Answer 1

1)Inventories are stated at the lower of cost and net realizable value. Cost is determined using the average cost method, except for materials in transit. The cost of finished goods and work in progress comprises raw materials, direct labor, other direct costs and related production overheads (based on normal operating capacity). It excludes costs of idle plant and abnormal waste. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Inventories are reduced for the estimated losses arising from excess, obsolescence, and decline in value. This reduction is determined by estimating market value based on future customer demand. The losses on inventory obsolescence are recorded as a part of cost of sales. 

It is appropriate because it takes into account future customer demand and technical developments in the industry

2) Net realizable value (NRV) = Estimated selling price - Cost of completion and disposal.

With a reduction in cost, of course, NRV also grows. Samsung can win by lowering costs, as price competition is high. With regards to the 2016 incident related to the Galaxy Note 7, experts found defects in the batteries, which were the cause of the ignition of the devices. The reasons lie in design flaws and device assembly technology.

Maybe the company wanted to reduce the cost of this phone without finalizing it and saved on test development, etc., but the release of this phone brought the company only losses.

I think that if this phone was already in great demand during marketing research, then it would be necessary to conduct more in-depth studies of this model. The consequences would be different.