AS2 Valuation of Inventories IPCC

AS 2 Valuation of inventories 1

Valuation of inventories

AS---2


objective

Computation of cost of

inventories/stock

Determine the value of closing stock

to be shown in B/s

Till not sold Recognized as revenue


Inventories consist of the following :

Held for sale in ordinary course of business ( FINISHED GOODS)

In the process of production of such sale (raw material and WIP)

In the form of materials or supplies to be consumed in production process or in rendering services

(stores,spares, raw material, consumables)

Spares which can be used only in connection with an item of fixed assets and whose use is irregular , such machinery

spares are accounted for in accordance with AS 10’ accounting for FA ‘


Accounting for machinery spares


• Machinery spares , which are not specific to a particular item of FA but can be used generally for various items of FA

SHOULD be treated as inventories for the purpose of AS-2

charged to the statement of Profit & loss acccount


• Whether to capitalise machinery spare under AS—10 or not will depend on the facts and circumstances of each case.

• However, the machinery spare of the following types should be capitalized being the nature of capital spares/ insurance spares:

1) Machinery spares which are SPECIFIC to a particular item of fixed assets ie it can be used only in connection with a particular item of FA

2) Their use is expected to be IRREGULAR.

e.g in office , there are other assets , spares parts used in such assets are irregular in use.


• When the related fixed asset is discarded or sold

WDV - disposal value of the spares should be written off


MEASUREMENT OF INVENTORIES• Inventories should be valued at lower of cost and NRV.• Major points for valuation of inventories:

Determination of cost of

inventories

Determination of NRV

Comparing cost & NRV


What is cost of inventories?

Cost of purchase

Purchase price

+ Duties & Taxes

+ Freight inward

+ Other cost directly associated

TOTAL (A)

Recoveries

Duties & Taxes recoverable

+ Trade discounts

+ Rebate

+ Duty drawback

TOTAL (B)

Cost of inventory [ A – B]


Exclusions from cost of InventoriesX Abnormal amounts of wasted : material labour other production costX Storage cost X Administrative overheadX Selling & distribution costX Interest & borrowing cost [ however, As – 16 allows such cost to be

included.


Cost formula

Cost formula

Specific identification method

Where specific identification method

is NOT applicable

Cost of inventories in certain conditons

3


Specific identification method for determining cost of inventory

directly linking the cost with specific items

In case of purchase of item specifically segregated for specific project & is not ordinarily interchangeable.

purchase of item for specific project X which is not ordinarily inter changeable

In case of goods or services produced & segregated for specific project. goods segregated for services specific project

produced


Where specific identification method is NOT applicable

The cost of inventories is valued by the following methods:

FIFO Weighted average cost


Cost of inventories in certain conditions

• When it is impractical to calculate the costFollowing methods

Retail Method

Standard Cost


Standard Cost • It takes into account

Normal level of consumption of material and supplies labour efficiency capacity utilization


Retail Method• It is used in retail business:• when it is difficult to ascertain cost of individual item.• When item of inventories are rapidly changing items, having similar margins

& no other method of cost can be used.

cost of inventory is determined by reducing from the sales value inventories the approximate % of gross margin.

Sales value - % gross margin [ takes into consideration the inventory that has been marked down to below its original selling price]


Net realisable value • It is the estimated selling price in ordinary course of business, less estimated cost

of completion and estimated cost necessary to make the sale. selling price - less: estimated cost of completion - less:estimated cost necessary to make the sale

Such estimations are made on each balance sheet date. Estimation of NRV also takes into account the purpose for which the inventory is

held.


Estimation of NRV


• The NRV of the material & other supplies held for use in production of finished goods is estimated as under:

• If the finished product in which raw material & supplies used is sold at cost or above cost.

• then the estimated realisable value of raw material & supplies is considered more than its cost.

• Therefore inventories of raw material will be valued at cost.

Shirt is the finished product It is sold at cost or above cost Then estimated RV of the raw material

and supplies will be considered more than cost . Therefore inventories of raw material will be valued at cost


• If the finished product in which raw material & supplies used is sold at cost or above cost.

• then the estimated realisable value of raw material & supplies is considered more than its cost.

• Therefore inventories of raw material will be valued at cost.

Shirt is the finished product It is sold below cost Then estimated RV of the raw material /

supplies is equal to replacement price of raw material or supplies Therefore inventories of raw material will be valued at Replaced price.


1. Raw material was purchased at Rs. 100 per kg. price of raw material is on the decline. The finished goods in which the raw material is incorporated are expected to be sold at below cost. 10,000 kgs of raw material is in stock at the year end. Replacement cost is Rs. 80 per kg. How will you value the inventory?

In this case, the stock of 10000 kgs of raw material will be valued at Rs. 80 per kg.

The finished goods, if on stock , should be valued at cost or NRV whichever is less.


2. Cost of production of product D is given below:Raw material per unit Rs 120Wages per unit Rs 80Overhead per unit Rs 50 Total RS 250

As on the balance sheet date the replacement cost of raw material is Rs 110 per unit. There were 1000 units of raw material on 31- 3- 14.

Calculate the value of closing stock of raw material in the following conditions:a) If the finished product is sold at the rate of Rs. 275 per unit,what will be the

value of closing stock of raw material. The value of closing stock would at cost i.e RS 120 per unit. Total value would be 1000 x Rs 120 = Rs 120000.


• If the finished product is sold at the rate of Rs.230 per unit, what will be value of closing stock of raw material?

The closing stock would be valued at replaced value Rs. 110 per unit. the total value would be Rs 110,003. The company sells IMFL & beer to the customers, some of the customers consumed the

beer in the bars run by it .while leaving the bar, the consumers left the empty bottles in the bars and the company take the possession of these empty bottles. The empty bottles are disposed off by the company. The company has laid down detailed procedures for the maintenance of the records, tenders to be called for the disposal of the empty bottles-

a) Whether the stock of empty bottles is an asset of the company.b) If so, whether the stock of empty bottles existing as on the date of the balance sheet is to

be considered as inventories of the company. The stock of empty bottles is an asset of the company being a resource controlled by the

company as a result of past events from which future economic benefits are expected to flow to it.

The stock of empty bottles existing at the balance sheet date is the inventory of the company.

It will be valued at the lower of cost and NRV, also the same is not considered as income hence the cost of bottles is NIL, the total stock should be reflected at the nominal value of Re 1 in the balance sheet.

AS2 Valuation of Inventories IPCC

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