On 1 April 20X6 Botswana Mining Ltd (Botswana) assessed that its Mollymook area of interest contained economically recoverable reserves of 53778 ounce of gold. On the same day the entity installed the following assets (with zero residual values): Mining site building (non-portable): cost $1437392 useful life 20 years Mining equipment (non-portable): cost $2388760 useful life 15 years Machineries and equipment (portable): cost $750881, useful life 7 years The above assets were ready for use on 1 July 20X6. Botswana expects to extract the entire reserves in 5 years. For the year ending 30 June 20X7, the entity had extracted 4421 ounces of gold (assuming zero production cost). What is the cost of the gold inventory for the year ending 30 June 20X7?

Question

BlackTom AI · Accepted Answer

Use the units-of-production (output) basis: mine-related plant costs are allocated to inventory in proportion to ounces extracted because the economic benefits of those assets are consumed in line with production.

1) Relevant knowledge
- For extraction/mining assets that produce benefits in proportion to physical output, depreciation/consumption is recognized on a units-of-production basis (cost per ounce = asset cost / total recoverable ounces).
- Inventory cost of extracted ore includes the portion of asset cost attributable to the ounces extracted in the period.

2) Step-by-step calculation
- Compute total cost of the assets installed:
  Mining site building = 1,437,392
  Mining equipment = 2,388,760
  Machineries & portable equipment = 750,881
  Total cost = 1,437,392 + 2,388,760 + 750,881 = 4,577,033

- Compute cost per ounce using total recoverable reserves (53,778 ounces):
  Cost per ounce = Total cost / Total ounces = 4,577,033 / 53,778 ≈ 85.141 (rounded)

- Allocate cost to inventory for the year by multiplying cost per ounce by ounces extracted (4,421 ounces):
  Inventory cost = 85.141 × 4,421 ≈ 376,270

3) Intermediate arithmetic (exact fraction form)
  Inventory cost = 4,577,033 × 4,421 / 53,778 ≈ 376,270 (rounded to the nearest dollar)

4) Why this is correct
- The assets were installed to support extraction and the consumption of their economic benefits corresponds directly to ounces produced; therefore units-of-production is the appropriate method under accounting for mineral extraction. This method allocates the asset cost to inventory in proportion to ounces extracted, giving the inventory cost above.

5) Why other numeric answers are incorrect
- Using straight-line annual depreciation and then prorating by production (i.e., annual depreciation ≈ 338,389 × 4,421/53,778) would yield only ~27,800 — far too low because straight-line ignores the production-driven consumption pattern. The other given option values (596; 107,580; 324,616; 179,449; 421,810) do not match the units-of-production allocation calculation shown above.

Conclusion: The cost of the gold inventory for year ending 30 June 20X7 is 376,270, which matches the provided answer.

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