Chemical manufacturers and traders, where valuation, classification and process costing decide the result.
The accounts of a chemicals business usually turn on two things: what the stock is worth and how production cost has been allocated. Where a process yields co-products or by-products, the allocation base is a judgement that has to be applied consistently and explained.
Classification decides the GST rate and the credit position. Products that look similar can attract different treatment, and a classification taken years ago is frequently the subject of a notice later.
Accounting and reporting
- Valuation of raw materials, work in progress and finished goods, including the treatment of production overheads
- Cost of production and its allocation where co-products and by-products arise
- Plant and machinery, depreciation, and the line between repairs and capital expenditure
- Provisions where environmental, restoration or product obligations may arise
- Working capital: inventory holding periods, credit terms and borrowing
Regulatory
- GST classification of products, and the input tax credit position that follows from it
- Cost records and cost audit, which apply to companies in specified industries depending on product and turnover
- Environmental and safety registrations, which sit outside the accounts but can create disclosable obligations
Internal controls
- Physical verification of inventory and reconciliation to the records
- Stores issue controls and consumption norms against actual usage
- Purchase authorisation and three-way matching
- Cut-off at the period end for dispatches and receipts
Questions that arise
- Is closing inventory valued at the lower of cost and net realisable value, consistently applied?
- Is the overhead absorption base reasonable, and is abnormal loss excluded from inventory cost?
- Is input tax credit supported by valid invoices and consistent with the classification adopted?
- Do the cost record requirements apply to any of the products made?