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How should any pre-production costs in respect of that area be treated

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Question: 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:
Meaning: In the case of the extraction and mining industry, companies generally incur an additional expense, which is mainly incurred to explore or develop an item or assets of the company. These additional expenses borne by the companies are often referred to as preproduction costs (El Guindy and Basuony, 2018).

Facts: In the given scenario, it is observed that the company has incurred pre-exploration costs to abandon an area of interest.
Analysis: Since the motto of these expenses was to abandon an area, these expenses are to be written against the fair value of the asset that is abandoned by the entity in the financial year when such decisions are taken by the entity.

Inventory costs
It includes the price of ordering and keeping items, as well as the documentation that goes along with them. When choosing how much inventory to keep on hand, management takes this cost into account. This can affect the rate at which customers' orders are fulfilled, as well as the flow of the production process. The many forms of inventory expenditures are listed below.

Ordering Prices
It is observed that it is one of the essential components of the total cost of inventory. Ordering expense can be referred to as the expense incurred by the business at the time of making an order to its supplier or manufacturer. However, it suggested to every trader to reduce the number of orders made and orders in bulk quantity as the ordering expense is totally dependant on the number of orders and not the amount of quantity purchased.

Expenses of Holding
It is noticed that it is one of among the essential expenses, which every entity is required to incur to sell its products or render its services. It can be defined as the expense incurred to store the goods till it is sent to the market for final selling.

Price of obsolescence
Some inventory goods may never be utilized or maybe destroyed while in storage, necessitating their disposal at a reduced or free cost. This can be a significant expenditure depending on how perishable the inventory is or how quickly technological developments affect inventory prices.

The three main components of cost of industry are as follows:
• purchase expenses,
• conversion expenses, and
• additional expenses
However, it is observed that the above expenses are comprised of both fixed and variable expenses. Some of the examples of the cost of inventory are as follows:
• Maintenance expense
• Depreciation of mining and production asset
• Depreciation of stripping asset
• Royalties
• Research expenses for developing a plethora of ways to use copper
• Exploration expense (Which is not capitalized)
• Administration expenses
• Storage expenses

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