Accounting standard 2- Valuation of Inventory Valuation Of Inventory

Objective of the standard:

The objective of the standard is to show the inventory in the Balance sheet till it is sold out and recognized as revenue.

What does Inventory mean here?

Finished goods which are held for sale Raw material and W.I.P (Work in Progress) Stores, Spares, Other consumables (Production)

Spares???? Machinery spares??? machinery comes under capital asset and its spares should be capitalized na??????
Yes, But those Spares which are not specific to a particular item of fixed asset should be treated as inventories for the purpose of AS 2..... And such machinery spare are charged to P&L statement when they are issued for consumption.

How to Measure the Inventories?

Inventories should be valued at lower of the COST or NET REALIZABLE VALUE.

Then What's the COST???

Cost of the Inventory = COP + COC + COC COP = Cost Of Production

COC = Cost of Conversion: It means the cost which incurred on Rawmaterial to make it to the condition of salable goods for the firm..( means firm's finished stock) In this cost of conversion the Over Head allocation needs to be taken care...... 1. The Allocation of Fixed Overhead will be on Normal Capacity. 2. The Allocation of Variable Overhead will be on Actual Production.

OK, What about cost of Joint Products?????

What about in Case of by-Products??

Net Conversion Cost = Cost of conversion - Net realizable value.

Note: 1. Cost includes all expenses which are met by the enterprise to bring the product to finished stock state. 2. In Valuation absorption costing technique is used. 3. Actual Expenses which are met by the enterprise are considered and not those which refundable

Exclusions from Inventory...

1. Abnormal cost 2. Storage cost 3. Administrative Overhead 4. Selling and Distribution Overhead 5. Borrowing cost & Interest cost

Cost Formula

Standard Cost: A Standard cost is determined by taking into account of normal levels of Men Material Machine and capacity.. Retail Cost Method: Under this method the cost is determined by reducing a % of Gross margin from sale value of the inventory..

What is NET REALIZABLE VALUE?

It means the estimated value of Selling price n ordinary course of business Less estimated cost of completion and estimated cost necessary to make the sale....

CENVAT Impact On Inventory And AS 2