CA INTERMEDIATE JITIN TYAGI CLASSES AS -2

AS-2 INVENTORY VALUATION

Date of Issue - 1/4/1999

Applicable For All Corporate and Non Corporate Entities

Corresponding IND AS/IFRS IND AS 2 IFRS 2

1) iNTRODUCTiON
AS 2 (Revised) ‘Valuation of Inventories’, prescribe the accounting treatment which provides the
guidance for determining the value of Inventories to be shown in financial statements. It also
provides guidance on the cost formulas that are used to assign costs to inventories and any write-
down thereof to net realisable value.

2) meaNiNg
AS 2 (Revised) defines inventories as assets held
• For sale in the ordinary course of business, or
• In the process of production for such sale, or
•For consumption in the production of goods or services for sale, including maintenance
supplies and consumables other than machinery spares, servicing equipment and standby
equipment meeting the definition of Property, plant and equipment.

3. exClUDeD fROm The sCOpe Of as 2 (ReviseD):

(a) Work in progress arising under construction contracts, i.e. cost of part construction, including
directly related service contracts, being covered under AS 7, Accounting for Construction
Contracts; Inventory held for use in construction, e.g. cement lying at the site should however be
covered by AS 2 (Revised).

(b) Work in progress arising in the ordinary course of business of service providers i.e. cost of
providing a part of service. For example, for a shipping company, fuel and stores not consumed
at the end of accounting period is inventory but not costs for voyage-in-progress. Work-in-
progress may arise for different other services e.g. software development, consultancy, medical
services, merchant banking and so on.

(c) Shares, debentures and other financial instruments held as stock-in-trade.

(d) Producers’ inventories of livestock, agricultural and forest products, and mineral oils, ores
and gases.

JTC CA JITIN TYAGI (B COM CA CS) Page 42

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2

4. TReaTmeNT Of spaRe paRTs, sTaND by eqUipmeNT aND

seRviCiNg eqUipmeNT
Case 1 If they meet the definition of PPE as per AS 10

Recognised as PPE as per AS 10.

Case 2 If they do not meet the definition of PPE as per AS 10

Such items are classified as Inventory as per AS 2

5. valUaTiON Of iNveNTORies

NRv Of Raw maTeRials helD fOR Use OR DispOsal

Materials and other supplies held for use in the production of inventories are not written down
below cost if the selling price of finished product containing the material exceeds the cost of the
finished product. The reason is, as long as these conditions hold the material realises more than
its cost as shown below.

JTC CA JITIN TYAGI (B COM CA CS) Page 43

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2

Que.1 The company deals in three products, A, B & C, which are neither similar nor
interchangeable. 'At the time of closing of its account for the year 2010
2010-11, the Historical Cost
and Net Realizable Value of the items of closing stock are determined as follows:
Items Historical Cost ((₹ in lakhs) Net Realisable Value (₹
( in
lakhs)
A 40 28
B 32 32
C 16 24

What will be the value of closing stock?

Ans 1: As per para 5 of AS 2 on ‘Valuation of Inventories’, inventories should be valued at the
lower of cost and net realizable value.
Inventories should be written down to net realizable value on an item
item--by-item basis in the given
case.
Items Historical Cost (₹ in Net Realisable Value (₹ in Valuation of closing stock
lakhs) lakhs) (₹ in lakhs)
A 40 28 28
B 32 32 32
C 16 24 16
88 84 76

Hence, closing stock will be valued at ₹ 76 lakhs.

JTC CA JITIN TYAGI (B COM CA CS) Page 44

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2
Que.2 On 31st March 2013 a business firm finds that cost of a partly finished unit on that date is ₹
530. The unit can be finished in 2013-14 by an additional expenditure of ₹ 310. The finished unit
can be sold for ₹ 750 subject to payment of 4% brokerage on selling price. The firm seeks your
advice regarding the amount at which the unfinished unit should be valued as at 31st March,
2013 for preparation of final accounts.

Ans:2 Valuation of unfinished unit

₹
Net selling price 750
Less: Estimated cost of completion (310)
440
Less: Brokerage (4% of 750) 30
Net Realisable Value 410
Cost of inventory 530
Value of inventory (Lower of cost and net realisable value) 410

Note: The above answer is given on the assumption that partly finished unit cannot be sold in
semi finished form and its NRV is zero without processing it further.

Que 3 Cost of a partly finished unit at the end of 2009-10 is ₹ 150. The unit can be finished next year by a
further expenditure of ₹ 100.
The finished unit can be sold at ₹ 250, subject to payment of 4% brokerage on selling price. The value of
inventory is determined below:
Ans 3: ₹
Net selling price 250
Less: Estimated cost of completion 100
150
Less: Brokerage (4% of 250) (10)
Net Realisable Value 140
Cost of inventory 150
Value of inventory (Lower of cost and net realisable value) 140

Que 4 X Co. Limited purchased goods at the cost of ₹40 lakhs in October, 2010. Till March, 2011, 75% of
the stocks were sold. The company wants to disclose closing stock at ₹10 lakhs. The expected sale value is
₹11 lakhs and a commission at 10% on sale is payable to the agent. Advise, what is the correct closing
stock to be disclosed as at 31.3.2011.
Ans: As per Para 5 of AS 2 “Valuation of Inventories”, the inventories are to be valued at lower of cost
and net realizable value.
In this case, the cost of inventory is ₹10 lakhs. The net realizable value is 11,00,000 × 90%= ₹9,90,000. So,
the stock should be valued at ₹9,90,000.

Que.5 How do you deal with the following?

On 31.3.2012, the closing stock of Gourav Ltd. includes 10,000 units costing @ ₹ 10 i.e., ₹ 1,00,000.
But the current market price as on that date was @ ₹ 9 i.e., ₹ 90,000.
Ans:5 According to AS 2, Valuation of Inventories, an assessment is made of net realisable value
as at each Balance Sheet date.
Hence , the value of stock should be ₹ 90,000 (i.e. @ 9 per unit).

JTC CA JITIN TYAGI (B COM CA CS) Page 45

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2
Que.6 Sonar Bhandar deals in old colour TVs. It has 4 TVs the particulars of which are given
below :
You are asked to compute the value of stock to be included, in Balance Sheet for the year ended
31st March, 2009.
TVs Onida(₹) Philips(₹) EC (₹) Sony(₹) Total(₹)
Cost Price 10,000 20,000 35,000 50,000 1,15,000
(Expenses incurred to bring into saleable 3,000 2,000 5,000 - 10,000
conditions)
Net Realisable Value 18,000 30000 36,000 55,000 1,39,000

Ans:6 As per para 5, AS 2, Valuation of Inventories, inventories should be valued at the lower of
cost or net realisable value, which are:
TVs Onida(₹) Philips(₹) EC (₹) Sony(₹) Total(₹)
Cost Price (including expenses) 13,000 22,000 40,000 50,000 1,25,000
Net Realisable Value 18,000 30,000 36,000 55,000 1,39,000
Value of Stock 13,000 22,000 36,000 50,000 1,21,000

Value of stock to be included in the Balance Sheet will be ₹ 1,21,000 (i.e. Lower of cost (₹ 1,25,000)
and net realisable value ₹ 1,21,000).

Que.7 The following particulars are presented by M Ltd. (deals in clothing) as on 31.3.2012:
Compute the value of stock as per AS 2.
Stock held by M Ltd. ₹
(Cost Price) 10,550
(Net Realisable Value) 11,500
The details of such stocks were:
Cost Price Net Realisable Value
Cotton 5,600 4,960
Woolen 3,450 4,540
Synthetic 1,500 2,000
10,550 11,500
Ans:7 Valuation of Stock as per AS 2
As per AS 2, para 21, inventories are usually written-down to net realisable value on an item-by-
item basis:
Cost Price Net Realisable Value of Closing Stock
Value (₹)
Cotton 5,600 4,960 4,960
Woolen 3,450 4,540 3,450
Synthetic 1,500 2,000 1,500
10,550 11,500 9,910

Hence, value of stock will be considered for ₹ 9,910 as per AS 2.

Que.8 The total stock of A Ltd. as on 31.3.2012 was ₹ 5,00,000 of which stock amounting to ₹
31,000 were not ascertained as per AS 2. Compute the value of the said stocks as per AS 2 for
inclusion in financial statements as on that date.

JTC CA JITIN TYAGI (B COM CA CS) Page 46

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2

Type of Product Cost of Materials Productive Selling and Estimated

(₹) Expenses Distribution Selling
incurred (₹) expense to be Price (₹)
incurred (₹)
P 10,000 2,000 1,000 15,000
S 5,000 - 500 4,500
T 12,000 3,000 2,000 18,000
27,000 5,000 3,500 37,500

Ans.8 As per para 21, AS 2, inventories are usually written-down to net realisable value on an
item-by-item basis. Thus, value of stock will be computed as:
Type of Cost Price (including Net Realisable Value Value of Stock to be
Product Production Exp.) (excluding Selling & taken (lower of Cost
Distribution Expenses Price & Net
from Selling Price) (₹) Realisable Value) (₹)
P 12,000 (₹ 10,000 + ₹ 2,000) 14,000 (₹ 15,000- ₹ 1,000) 12,000
S 5,000 (-) 4,000 (₹ 4,500- ₹ 500) 4,000
T 15,000 (₹ 12,000 + ₹ 3,000) 16,000 (₹ 18,000- ₹ 2,000) 15,000
31,000

So, Value of Stock will be ₹ 31,000 for inclusion in financial statements as per AS 2.

COsTs Of iNveNTORy
Costs of inventories comprise all costs of purchase, costs of conversion and other costs incurred
in bringing the inventories to their present location and condition.

COsTs Of pURChase Of maTeRial

Purchase Price of Inventories XXX
+Duties & Taxes (not Recoverable) XXX
+ Freight Inward XXX
+Other Expenses directly related to acquisition of Inventory XXX
(-) Trade Discount (XXX)
(-) Rebates (XXX)
(-) Duty Drawbacks (XXX)
XXX
COsT fORmUla
Mostly inventories are purchased / made in different lots and unit cost of each lot frequently
differs. In all such circumstances, determination of closing inventory cost requires identification
of units in stock to have come from a particular lot. This specific identification is best wherever
possible. In all other cases, the cost of inventory should be determined by the First-In First-Out
(FIFO), or Weighted Average cost formula. The formula used should reflect the fairest possible
approximation to the cost incurred in bringing the items of inventory to their present location
and condition.

JTC CA JITIN TYAGI (B COM CA CS) Page 47

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2

COsTs Of CONveRsiON
The costs of conversion include costs directly related to production, e.g. direct labour. They also
include overheads, both fixed and variable that are incurred in converting raw material to
finished goods. The fixed production overheads should be absorbed systematically to units of
production over normal capacity. Normal capacity is the production the enterprise expects to
achieve on an average over a number of periods or seasons under normal circumstances, taking
into account the loss of capacity resulting from planned maintenance.

The actual level of production may be used if it approximates the normal capacity. The amount
of fixed production overheads allocated to each unit of production should not be increased as a
consequence of low production or idle plant. Unallocated overheads (i.e. under recovery) are
recognised as an expense in the period in which they are incurred. In periods
period of abnormally high
production, the amount of fixed production overheads allocated to each unit of production is
decreased so that inventories are no
not measured above cost. Variable production overheads are
assigned to each unit of production on the basis of the actual use of the production facilities.

JTC CA JITIN TYAGI (B COM CA CS) Page 48

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2

Que 9 ABC Ltd. has a plant with the capacity to produce 1 lac unit of a product per annum and
the expected fixed overhead is ₹ 18 lacs. Fixed overhead on the basis of normal capacity is ₹ 18
(18 lacs/1 lac).

Case 1: Actual production is 1 lac units. Fixed overhead on the basis of normal capacity and
actual overhead will lead to same figure of ₹ 18 lacs. Therefore it is advisable to include this on
normal capacity.

Case 2: Actual production is 90,000 units. Fixed overhead is not going to change with the change
in output and will remain constant at ₹ 18 lacs, therefore, overheads on actual basis is ₹ 20 per
unit (18 lacs/ 90 thousands). Hence by valuing inventory at ₹ 20 each for fixed overhead
purpose, it will be overvalued and the losses of ₹ 1.8 lacs will also be included in closing
inventory leading to a higher gross profit then actually earned. Therefore, it is advisable to
include fixed overhead per unit on normal capacity to actual production (90,000 x 18) ₹ 16.2 lacs
and rest ₹ 1.8 lacs should be transferred to Profit & Loss Account.

Case 3: Actual production is 1.2 lacs units. Fixed overhead is not going to change with the change
in output and will remain constant at ₹ 188 lacs, therefore, overheads on actual basis is ₹ 15 (18
lacs/ 1.2 lacs). Hence by valuing inventory at ₹ 18 each for fixed overhead purpose, we will be
adding the element of cost to inventory which actually has not been incurred. At ₹ 18 per unit,
total fixed overhead comes to ₹ 21.6 lacs whereas, actual fixed overhead expense is only ₹ 18 lacs.
Therefore, it is advisable to include fixed overhead on actual basis (1.2 lacs x 15) ₹ 18 lacs.

Que 10

JTC CA JITIN TYAGI (B COM CA CS) Page 49

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2
Material 1,00,000 Kg @ Rs 20 per Kg
Labour Cost Rs. 25 per piece
Variable Overheads Rs. 5 per piece
Fixed Overhead Rs. 5,00,000
Actual production 90,000 pieces
Normal Production 1,00,000 pieces
Calculate Value of stock for 5,000 pieces?
Ans: Rs. 2,86,111

Que.11 You are required to value the inventory per kg of finished goods consisting of:
₹ per kg.
Material cost 200
Direct labour 40
Direct variable overhead 20
Fixed production charges for the year on normal working capacity of 2 lakh kgs is ₹20 lakhs.
4,000 kgs of finished goods are in stock at the year end.
Ans:11 In accordance with paras 8 & 9 of AS 2, the cost of conversion include a systematic
allocation of fixed & variable overheads that are incurred in converting materials into finished
goods. The allocation of fixed overheads for the purpose of their inclusion in the cost of
conversion is based on normal capacity of the production facilities. Cost per kg. of finished
goods:
₹
Material Cost 200
Direct Labour 40
Direct Variable Production Overhead 20
Fixed Production Overhead (20,00,000/2,00,000) 10 70
270
Hence the value of 4,000 kgs. of finished goods = 4,000 kgs x ₹ 270 = ₹ 10,80,000

Que.12 In a production process, normal waste is 5% of input. 5,000 MT of input were put in
process resulting in wastage of 300 MT.
Cost per MT of input is ₹1,000. The entire quantity of waste is on stock at the year end. State
with reference to Accounting Standard, how will you value the inventories in this case?
Ans: As per para 13 of AS 2 (Revised), abnormal amounts of wasted materials, labour and other
production costs are excluded from cost of inventories and such costs are recognized as
expenses in the period in which they are incurred. In this case, normal waste is 250 MT and
abnormal waste is 50 MT.
The cost of 250 MT will be included in determining the cost of inventories (finished goods) at the
year end. The cost of abnormal waste amounting to ₹50,000 (50 MT × ₹1,000) will be charged to
the profit and loss statement.

JOiNT OR by-pRODUCTs
In case of joint or by products, the costs incurred up to the stage of split off should be allocated
on a rational and consistent basis. The basis of allocation may be sale value at split off point, for
example, value of by products, scraps and wastes are usually not material. These are therefore

JTC CA JITIN TYAGI (B COM CA CS) Page 50

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2
valued at net realisable value. The cost of main product is then valued as joint cost minus net
realisable value of by-products, scraps or waste.

Que.13 From the following information presented by P Ltd. ascertain the value of stock to be
included in Balance Sheet:
Cost Price of certain stock amounted to ₹ 60,000; being obsolete, it can be used for production
purposes after incurring ₹ 10,000 for modification. The same could be used as a by-product for an
existing product, the purchase price for the same amounts to ₹ 40,000.
Ans: Cost price of the product (given) ₹ 60,000.
Net Realisable Value of the product ₹ 40,000 - ₹ 10,000 = ₹ 30,000. Hence, ₹ 30,000 should be
treated as the Value of Stock to be included in Balance Sheet.

OTheR COsTs
(a) These may be included in cost of inventory provided they are incurred to bring the inventory
to their present location and condition. Cost of design, for example, for a custom made unit may
be taken as part of inventory cost.

(b) Interest and other borrowing costs are usually considered as not relating to bringing the
inventories to their present location and condition. These costs are therefore not usually included
in cost of inventory. Interests and other borrowing costs however are taken as part of inventory
costs, where the inventory necessarily takes substantial period of time for getting ready for
intended sale. Example of such inventory is wine.

(c) The standard is silent on treatment of amortisation of intangibles for ascertaining inventory
costs. It nevertheless appears that amortisation of intangibles related to production, e.g. patents
right of production or copyright for a publisher should be taken as part of inventory costs.

(d) Exchange differences are not taken in inventory costs.

exClUsiONs fROm The COsT Of iNveNTORies

In determining the cost of inventories, it is appropriate to exclude certain costs and recognise
them as expenses in the period in which they are incurred. Examples of such costs are:
(a) Abnormal amounts of wasted materials, labour, or other production costs;
(b) Storage costs, unless the production process requires such storage;
(c) Administrative overheads that do not contribute to bringing the inventories to their present
location and condition;
(d) Selling and distribution costs.

Que.14 “In determining the cost of inventories, it is appropriate to exclude certain costs and
recognize them as expenses in the period in which they are incurred”. Provide examples of such
costs as per AS 2 'Valuation of Inventories'.
Ans:14 As per AS 2 ‘Valuation of Inventories’, certain costs are excluded from the cost of the
inventories and are recognised as expenses in the period in which incurred. Examples of such
costs are:
(a) abnormal amount of wasted materials, labour, or other production costs;

JTC CA JITIN TYAGI (B COM CA CS) Page 51

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2
(b) storage costs, unless those costs are necessary in the production process prior to a further
production stage;
(c) administrative overheads that do not contribute to bringing the inventories to their present
location and condition; and
(d) selling and distribution costs

Que.15 The Company X Ltd., has to pay for delay in cotton clearing charges. The company up to
31.3.2010 has included such charges in the valuation of closing stock. This being in the nature of
interest, X Ltd. decided to exclude such charges from closing stock for the year 2010-11. This
would result in decrease in profit by ₹5 lakhs. Comment.
Ans:15 As per para 12 of AS 2 (revised), interest and other borrowing costs are usually
considered as not relating to bringing the inventories to their present location and condition and
are therefore, usually not included in the cost of inventories. However, X Ltd. was in practice to
charge the cost for delay in cotton clearing in the closing stock. As X Ltd. decided to change this
valuation procedure of closing stock, this treatment will be considered as a change in accounting
policy and such fact to be disclosed as per AS 1. Therefore, any change in amount mentioned in
financial statement, which will affect the financial position of the company should be disclosed
properly as per AS 1, AS 2 and AS 5.
Also a note should be given in the annual accounts that, had the company followed earlier
system of valuation of closing stock, the profit before tax would have been higher by ₹ 5 lakhs.

Que.16 How will you deal with the following situation?

“A company deals in purchase and sale of timber and has included notional interest charges
calculated (on the paid-up share capital and free reserves) in the value of stock of timber as at the
Balance Sheet date as part of cost of holding the timber”.
Ans:16 According to the para 12 of AS 2, Valuation of Inventories, interest and other borrowing
costs are usually considered as not relating to bringing the inventories to their present location
and condition and are, therefore, usually not included in the cost of inventories. Hence, the
valuation of closing stock of timber cannot be considered as it is not in conformity with AS 2.

Que.17 How would you deal with the following in the annual accounts of a company for the
year ended 31.3.2012?
“The company has to pay delayed cotton clearing charges over and above the negotiated price
for asking delayed delivery of cotton from the supplier’s godown. Up to 2010-11, the company
has regularly included such charges in the valuation of closing stock. This being in the nature of
interest the company has decided to exclude it from closing stock valuation for the year 2011-12.
This would result into decrease in profit by ₹ 7.60 lakhs.”
Ans: As per para 12, AS 2, Valuation of Inventories, interest and other borrowing costs are
usually considered as not relating to bringing the inventories to their present location and
condition and are, therefore, usually not included in the cost of inventories. Thus, it becomes
quite clear that delayed cotton clearing charges which were treated in the nature of interest must
not be included while valuing closing stock as per the provision of AS 2 and it is not in
compliance with AS 2 which was done upto 2010-11. But from year 2011-12, the company
decided to change the earlier view i.e. they decided to exclude the same from the valuation of
closing stock which is, no doubt, in compliance with AS 2.

JTC CA JITIN TYAGI (B COM CA CS) Page 52

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2
As a result of change in accounting policy regarding valuation of stock the profit was reduced by
is ₹ 7.60 lakhs which must be disclosed in the financial statement or per AS 1 as Notes to
Account.

Que.18 Capital Cables Ltd., has a normal wastage of 4% in the production process. During the
year 2013-14 the Company used 12,000 MT of raw material costing ₹ 150 per MT. At the end of
the year 630 MT of wastage was in stock. The accountant wants to know how this wastage is to
be treated in the books. Explain in the context of AS 2 the treatment of normal loss and abnormal
loss and also find out the amount of abnormal loss if any.
Ans: 22 As per para 13 of AS 2 (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted
materials, labour and other production costs are excluded from cost of inventories and such costs
are recognized as expenses in the period in which they are incurred.
The normal loss will be included in determining the cost of inventories (finished goods) at the
year end.
Amount of Abnormal Loss:
Material used 12,000 MT @ ₹150 = ₹18,00,000
Normal Loss (4% of 12,000 MT) 480 MT
Net quantity of material 11,520 MT
Abnormal Loss in quantity 150 MT
Abnormal Loss ₹ 23,437.50
[150 units @ ₹ 156.25 (₹ 18,00,000/11,520)]
Amount ₹ 23,437.50 will be charged to the Profit and Loss statement

OTheR TeChNiqUes Of COsT measURemeNT

(a) Instead of actual, the standard costs may be taken as cost of inventory provided standards
fairly approximate the actual. Such standards (for finished or partly finished units) should be set
in the light of normal levels of material consumption, labour efficiency and capacity utilisation.
The standards so set should be regularly reviewed and if necessary, be revised to reflect current
conditions.

(b) In retail business, where a large number of rapidly changing items are traded, the actual costs
of items may be difficult to determine. The units dealt by a retailer however, are usually sold for
similar gross margins and a retail method to determine cost in such retail trades makes use of the
fact. By this method, cost of inventory is determined by reducing sale value of unsold stock by
appropriate average percentage of gross margin.

Que 19 A trader purchased certain articles for ₹ 85,000. He sold some of articles for ₹ 1,05,000. The
average percentage of gross margin is 25% on cost. Opening stock of inventory at cost was ₹ 15,000. Cost
of closing inventory is shown below:
₹
Sale value of opening stock and purchase (₹ 85,000 + ₹ 15,000) x 1.25 1,25,000
Sales (1,05,000)
Sale value of unsold stock 20,000
Less: Gross Margin (₹ 20,000 / 1.25) x 0.25 (4,000)
Cost of inventory 16,000

JTC CA JITIN TYAGI (B COM CA CS) Page 53

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2

DisClOsURes
The financial statements should disclose:
(a) The accounting policies adopted in measuring inventories, including the cost formula used;
and
(b) The total carrying amount of inventories together with a classification appropriate to the
enterprise.

Information about the carrying amounts held in different classifications of inventories and the
extent of the changes in these assets is useful to financial statement users.

Common classifications of inventories are:

(1) raw materials and components,
(2) work in progress,
(3) finished goods,
(4) Stock-in-trade (in respect of goods acquired for trading),
(5) stores and spares,
(6) loose tools, and
(7) Others (specify nature).

Que 20 In a production process, normal waste is 5% of input. 5,000 MT of input were put in
process resulting in wastage of 300 MT. Cost per MT of input is ` 1,000. The entire quantity of
waste is on stock at the year end. State with reference to Accounting Standard, how will you
value the inventories in this case?
Solution
As per AS 2 (Revised), abnormal amounts of wasted materials, labour and other production costs
are excluded from cost of inventories and such costs are recognised as expenses in the period in
which they are incurred.
In this case, normal waste is 250 MT and abnormal waste is 50 MT. The cost of 250 MT will be
included in determining the cost of inventories (finished goods) at the year end. The cost of
abnormal waste (50 MT x 1,052.6315 = ` 52,632) will be charged to the profit and loss statement.
Cost per MT (Normal Quantity of 4,750 MT) = 50,00,000 / 4,750 = ` 1,052.6315
Total value of inventory = 4,700 MT x ` 1,052.6315 = ` 49,47,368.

Que.21 Find out the value of stock to be included in the Balance Sheet:
Cost Price of stock amounts to ₹ 1,00,000 which is considered as an obsolete item. It can be sold
as scrap for ₹ 55,000, or the same can be sold for ₹ 70,000 after allowing a trade discount of @
10%, Cash discount of ₹ 3,000 and expenses to be incurred for disposal amounted to ₹ 3,000.
Ans: Cost Price ₹ 1,00,000
Computation of Net Realisable Value
₹
Sale proceeds 70,000
Less: Trade Discount @ 10% 7,000
63,000
Less: Disposal Expenses 3,000
60,000

JTC CA JITIN TYAGI (B COM CA CS) Page 54

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2
Stock should be valued as per cost price or net realisable value, whichever is lower. So, value of
stock will be ₹ 55,000.
It must be remembered that, while calculating net realisable value, cash discounts will be
excluded.

Que.22 X Ltd. presented the following particular as on 31.3.2012: Compute the value of stock as on
31.3.2012.
The total cost of product:
Cost per unit (₹)
Cost of materials (₹12 each) 50
Manufacturing inputs 30
Total Cost 80
Profit 20
Selling Price 100
On 31.3.2012, selling price has gone down suddenly from ₹ 100 to ₹ 70. Price of raw material has also
gone down to ₹ 8 each. X Ltd. had in its stock 6,000, units of materials which was bought as per the above
rate on the same date.
Ans.22 According to para 24, AS 2, when there has been a decline in the price of materials and it is
estimated that the cost of the finished products will exceed net realisable value, the materials are written-
down to net realisable value. In such circumstances, the replacement cost of the materials may be the best
available measure of their net realisable value. In this case, the total cost of ₹ 80 exceeds the net realisable
value, i.e., selling price, of ₹ 70 (as the price of raw materials had gone down from ₹ 12 to ₹ 8). So,
inventories should be valued @ ₹ 70 each and as such, the total value of stock would be ₹ 4,20,000 (i.e., ₹
6,000 units × ₹ 70).

Que.23 State with reference to accounting standards how you will value the inventories in the following
case:
Raw materials were purchased at ₹ 100 per kilo. Prices of raw materials are on the decline. The finished
goods in which the raw materials is incorporated is expected to be sold at below cost. 10,000 Kgs. of raw
materials is on stock at the year end. Replacement cost is ₹ 80 per kg.

Ans.23 As per para 24, AS 2, materials and other supplies held for use in the production of inventories
are not written-down cost if the finished products in which they will be incorporated are expected to be
sold at or above cost. However, when there has been a decline in the price of materials and it is estimated
that the cost of the finished products will exceed net realisable value,the materials are written down to
net realisable value. In this case, cost of raw material was ₹ 100 per kg. But the finished goods (which are
produced from the said raw materials) are expected to realise at below the cost price. So, the value of
10,000 kg of raw materials will be @ 80 per kg (i.e. On the basisof replacement cost) ₹ 8,00,000.

Que.24 Calculate the value of raw materials and closing stock based on the following
information:
Raw material X
Closing balance 500 units
₹ per unit
Cost price including excise duty 200
Excise duty (Cenvat credit is receivable on the excise duty paid) 10
Freight inward 20
Unloading charges 10
Replacement cost 150

JTC CA JITIN TYAGI (B COM CA CS) Page 55

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2
Finished goods Y
Closing Balance 1,200
₹ per unit
Material consumed 220
Direct labour 60
Direct overhead 40
Total Fixed overhead for the year was ₹ 2,00,000 on normal capacity of 20,000 units.
Calculate the value of the closing stock, when
(i) Net Realizable Value of the Finished Goods Y is ₹ 400.
(ii) Net Realizable Value of the Finished Goods Y is ₹ 300.

Ans.24 Situation (i)

When Net Realisable Value of the Finished Goods Y is ₹ 400
NRV is greater than the cost of Finished Goods Y i.e. ₹ 330
Hence, Raw Material and Finished Goods are to be valued at cost
Value of Closing Stock:
Qty Rate Amount (₹)
Raw Material X 500 220 1,10,000
Finished Goods Y 1,200 330 3,96,000
Total Cost of Closing Stock 5,06,000

Situation (ii)
When Net Realisable Value of the Finished Goods Y is ₹ 300
NRV is less than the cost of Finished Goods Y i.e. ₹ 330
Hence, Raw Material is to be valued at replacement cost and
Finished Goods are to be valued at NRV since NRV is less than the cost

Value of Closing Stock:

Qty Rate Amount (₹)
Raw Material X 500 150 75,000
Finished Goods Y 1,200 300 3,60,000
Total Cost of Closing Stock 4,35,000

Working Notes:
Raw Material X ₹
Cost Price 200
Less: Cenvat Credit -10
190
Add: Freight Inward 20
Unloading charges 10
Cost 220

Finished goods Y ₹
Materials consumed 220
Direct Labour 60
Direct overhead 40

JTC CA JITIN TYAGI (B COM CA CS) Page 56

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2
Fixed overheads (₹ 2,00,000/20,000 units) 10
Cost 330
Note: It has been considered that Raw Material X is used for the production of Finished Goods Y.

Que.25 Mr. Mehul gives the following information relating to items forming part of inventory as on 31-3-
2015. His factory produces Product X using Raw material A.
(i) 600 units of Raw material A (purchased @ ₹ 120). Replacement cost of raw material A as on 31-3-2015
is ₹ 90 per unit.
(ii) 500 units of partly finished goods in the process of producing X and cost incurred till date ₹ 260 per
unit. These units can be finished next year by incurring additional cost of ₹ 60 per unit.
(iii) 1500 units of finished Product X and total cost incurred ₹ 320 per unit. Expected selling price of
Product X is ₹ 300 per unit.
Determine how each item of inventory will be valued as on 31-3-2015. Also calculate the value of total
inventory as on 31-3-2015.

Ans:25 As per AS 2 “Valuation of Inventories”, materials and other supplies held for use in the
production of inventories are not written down below cost if the finished products in which they will be
incorporated are expected to be sold at cost or above cost. However, when there has been a decline in the
price of materials and it is estimated that the cost of the finished products will exceed net realizable
value, the materials are written down to net realizable value. In such circumstances, the replacement cost
of the materials may be the best available measure of their net realizable value. In the given case, selling
price of product X is ₹ 300 and total cost per unit for production is ₹ 320.
Hence the valuation will be done as under:
(i) 600 units of raw material will be written down to replacement cost as market value of finished product
is less than its cost, hence valued at ₹ 90 per unit.
(ii) 500 units of partly finished goods will be valued at 240 per unit i.e. lower of cost ₹ 320 (₹ 260 +
additional cost ₹ 60) or Net estimated selling price ₹ 240 (Estimated selling price ₹ 300 per unit less
additional cost of ₹ 60).
(iii) 1500 units of finished product X will be valued at NRV of ₹ 300 per unit since it is lower than cost ₹
320 of product X

Valuation of Total Inventory as on 31.03.2015:

Units Cost(₹) NRV/Replacement Cost Value = units x cost Or NRV
whichever is less (₹)
Raw material A 600 120 90 54000
Partly finished goods 500 260 240 120000
Finished goods X 1500 320 300 450000
Value of Inventory 624000

Que26 An enterprise ordered 13,000 Kg. of certain material at ₹ 90 per unit. The purchase price
includes excise duty ₹ 5 per Kg., in respect of which full CENVAT credit is admissible. Freight
incurred amounted to ₹ 80,600. Normal transit loss is 4%. The enterprise actually received 12,400
Kg and consumed 10,000 Kg.
Cost of inventory and allocation of material cost is shown below:
Ans : 26
(Normal cost per Kg.)
₹
Purchase price (13,000 Kg. x ₹ 90) 11,70,000
Less: CENVAT Credit (13,000 Kg. x ₹ 5) -65,000

JTC CA JITIN TYAGI (B COM CA CS) Page 57

CA INTERMEDIATE JITIN TYAGI CLASSES AS -2
11,05,000
Add: Freight 80,600
A. Total material cost 11,85,600
B. Number units normally received = 96% of 13,000 Kg. Kg.12480
C. Normal cost per Kg. (A/B) 95

Allocation of material cost

Kg. ₹ /Kg. ₹
Materials consumed 10,000 95 9,50,000
Cost of inventory 2,400 9 2,28,000
Abnormal loss 80 95 7,600
Total material cost 12,480 95 11,85,600
Note: Abnormal losses are recognised as separate expense.

JTC CA JITIN TYAGI (B COM CA CS) Page 58