Explain, what costs should be included in the cost of inventory of an entity involved in the extractive industries

Question 1: Explain how the lease liability and a right-of-use asset would be recognised and measured at the lease inception? Explain the typical expenses recognised by a lease during lease period.

ANSWER:

Recognition of Lease Liability:
It is observed that at the time of inception of the lease, the lease liability should always be identified as an asset or a liability as the case may be. However, it is also clearly depicted that this identification should be at an amount equivalent to the fair value of the asset.

Recognition of Right use asset:
It is very much essential on part of the lessees to recognize the right use asset and the related liability at the time of inception of the lease at an amount, which is equivalent to the current value of the minimum amount of lease paid (Oyewobiet al., 2020).

Typical Expenses
Typical expenses can be referred to as those expenses, which are typically incurred by the entity in the business, in which the entity is typically involved. However, it can also be described as an essential cost, which enables the business to operate effectively and efficiently in the market and sustain its competitive edge in the dynamic market. Some of the typical expenses incurred at the time of lease include rental expenses, expenses incurred for different types of services, different types of taxation expenses, etc.

Question 2: Discuss (Using Australian accounting standard)If a decision is made to abandon an area of interest, how should any pre-production costs in respect of that area be treated? Explain, what costs should be included in the cost of inventory of an entity involved in the extractive industries.

ANSWER:
Pre-production is generally considered as additional and necessary expenses, which are mainly incurred for the purpose of exploration and development of an area or an asset. In the given scenario, it is observed that a pre-exploration cost is incurred with a motto of abandoning an area of interest. In this case, these pre-production expenses should be written off against the value of the asset in the financial year in which this decision is taken.

In the case of the extraction industry, the cost of inventory includes three main components, which are purchase expenses, conversion expenses, and additional costs incurred in bringing the inventory to its present location and condition. Purchase expenses are referred to as those expenses which are directly interlinked to the production of the commodity. Conversion expense refers to those expenses which are incurred in converting the raw material into the finished product. Following are the lists of expenses that are generally included in the cost of inventory (Schmidthuberet al., 2020). Variable expenses are often given to the cost of inventory based on the total amount produced, whereas fixed expenses are allocated to the cost of inventory based on the regular capacity of service.

Labor cost
Direct material expense
Mining contractor expenses
Amount of water wasted
Transportation cost
Supervisor salary
Indirect expense
Maintenance expense

How the lease liability and a right-of-use asset would be recognised

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