Rules requiring all manufacturing entities presently using the Last-in, First-out Method to adopt the moving average method for inventory valuation purposes

October 12, 1984 REVENUE REGULATIONS NO. 14-84 SUBJECT : Rules Requiring All Manufacturing Entities Presently Using the Last-in, First-out Method to Adopt the Moving Average Method for Inventory Valuation Purposes TO : All Internal Revenue Officers and Others Concerned SECTION 1 . Scope . These Regulations, promulgated in accordance with Section 326 of the National Internal Revenue Code, implement the authority vested in the Commissioner of Internal Revenue by Section 36 of the same Code, as amended by Section 4 of Batas Pambansa Blg. 41, to adopt the moving average method for inventory valuation purposes. SECTION 2 . Requirement to change inventory valuation method to moving average method . Pursuant to the authority vested in the Commissioner of Internal Revenue by Section 36 of the National Internal Revenue Code, as amended by Batas Pambansa Blg. 41, all manufacturing entities presently using the Last-in, First-out method of inventory valuation are hereby required to adopt the moving average method on a per product basis. casia SECTION 3 . Valuation of ending inventories as of October 30, 1984 and fiscal years ending thereafter . The inventory of manufactured products and raw materials which shall form an integral part of the manufactured products as of October 30, 1984 and accounting period ending thereafter, shall be valued under the moving average method. SECTION 4 . Adoption of full absorption method . In order to conform as clearly as may be possible to the best accounting practices and to clearly reflect income, taxpayers engaged in the manufacturing industries must adhere to the full absorption method of inventory costing. Under the full absorption method of inventory costing, production cost must be allocated to goods produced during the taxable year, whether sold during the taxable year or in inventory at the close of taxable year. Thus, the taxpayer must include as part of inventoriable cost all direct production cost and to a certain extent, indirect production cost. Direct production costs are generally those costs which are incident to and necessary for production or manufacturing operations or processes and are components of the cost of either direct materials or direct labor or both. Direct materials cost includes the cost of those materials which become an integral part of the specific product and those materials which are consumed in the ordinary course of manufacturing and can be identified or associated with particular units or groups of units of a specific product. Direct labor cost includes the cost of labor which can be identified or associated with particular units or groups of units of a specific product. The elements of the direct labor cost includes such items as basic compensation, over-time pay, vacation and holiday pay, sick leave pay, shift differential, payroll taxes, etc. In general, the inclusion of exclusion of elements of indirect production cost as part of inventoriable cost, depends upon the treatment adopted by taxpayers which, in all cases, must be applied consistently and not inconsistent with generally accepted accounting principles. Indirect production cost includes all costs which are incident to and necessary for production or manufacturing operations or processes other than direct production cost. cd The elements of indirect production cost included the inventoriable cost are general and administrative expenses incident to and necessary for the taxpayer's production or manufacturing operations or processes, indirect labor and production supervisory wages, indirect materials and supplies, utilities such as heat, power and light, repairs and expenses, maintenance expenses, etc. To be excluded under indirect production cost are marketing expenses, advertising expenses, selling expenses, interest, research and experimental expenses, including product development expenses; general and administrative expenses incident to and necessary for the taxpayer's activities as a whole rather than to production or manufacturing operations or processes; and, salaries paid to officers attributable to the performance of services which are incident to and necessary for the taxpayer's activities taken as a whole rather than to production or manufacturing operations or processes. SECTION 5 . Valuation of inventories after October 30, 1984 . After October 30, 1984, inventories shall be valued under the moving average method. For this purpose, the inventory on October 30, 1984 shall be deemed as the first product acquired, manufactured or produced in applying the moving average method during 1985. SECTION 6 . Requirements for the use of moving average method . The following requirements shall be complied with in adopting the moving average method: (a) The moving average method shall be applicable to all types of inventory of manufactured products and raw materials which will form an integral part of the finished products. (b) The inventory shall be taken at cost, using the full absorption method, regardless of market value. (c) The method shall be used consistently from year to year, unless - cd (i) a change to a different method is approved by the Commissioner; or (ii) a modification is required by the Commissioner. SECTION 7 . Repealing Clause . Any regulation, ruling or portion thereof which are inconsistent with the provisions of these Regulations are hereby revoked or amended accordingly. cd i SECTION 8 . Effectivity . These Regulations shall apply to taxable years ending October 30, 1984, and those ending thereafter. ALFREDO PIO DE RODA Acting Minister of Finance Recommending Approval: RUBEN B. ANCHETA Acting Commissioner