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OBJECTIVE: Specifies the principles for valuing the inventory/stock To determine the value of inventory/stock to be shown in balance sheet till it is not sold and recognized as revenue.

APPLICABILITY: Work in progress arising under construction contracts, including directly related service contracts. Work in progress arising in the ordinary course of business of service providers. Eg: Incomplete Consultancies services, medical services in progress, etc. Shares, debentures and other financial instruments held as stock-intrade; And. Producers inventories of livestock, agricultural and forest products, and mineral oils, ores and gases.

DEFINITIONS: Inventories are assets : held for sale in the ordinary course of business. i.e.: finished goods. in the process of production for such sale. i.e.: semi finished goods (WIP) in the form of materials or supplies to be consumed in the production process or in the rendering of services. i.e. raw material, stores & spares For Eg: Spares which can generally used like tubelights kept as spare will be dealt as per AS 2 but spares which are specifically used like machine spare parts used as a tool in machine only will be dealt as per AS -10 & depreciated in same manner as per F.A. is dealt with.

VALUATION: Inventories should be valued at the lower of Cost and Net Realisable Value. The Practice of writing down inventories below cost to Net Realisable Value is consistent with the view that assets should not be carried in excess of amounts expected to be realised from their sale or use.

COST OF INVENTORIES: It includes: i Cost of purchase ii Cost of Conversion iiii Other cost.


Cost of Purchase Purchase price Duties & Taxes Freight Inward Other expenditure directly attributable to the acquisition Less: Duties & Taxes recoverable Trade Discount Rebate Duty Drawback


Cost of Conversion Labour Costs directly related to the production of finished goods

Fixed production overheads that remains relatively constant regardless of volume of production. And its allocation is done on normal capacity. Eg: Depreciation and maintenance of factory building, cost of factory management, etc. Variable Production Overhead that varies directly with the volume of production. And its allocation is done on actual production basis. Eg: Indirect material, Indirect labour, etc. i.e.: For the valuation of inventory we follow the principle of absorption costing where variable overheads are absorbed in actual production basis & fixed overhead in normal capacity basis.

EXCLUSIONS FROM THE COST: Abnormal wastages of materials, labour or other production costs. Storage costs, unless they are necessary in the production process. Eg: Production of Vine. Administrative overheads. Selling and distribution overheads.

COST FORMULA: Following Cost formulas can be used: 1) FIFO: Its improper method to match cost with revenue since the cost of goods sold is computed on the bases of old price that are possibly unrealistic. 2) Weighted average: This method assumes that the goods available for the sale are homogenous. 3) Specific Identification method: Its to be applied:

o In case of purchase of item specifically segregated for specific project and is not ordinarily interchangeable. o In case of goods or services produces and segregated for specific project. Specific Identification Method means method directly linking the cost with specific item of inventories.

When it is impractical to calculate the cost, the following methods may be followed to ascertain cost: 4) Standard Cost: It takes into account normal level of material and supplies, labour, efficiency and capacity utilization. 5) Retail Method: It is generally used in retail business, applicable when items of inventories are rapidly changing items and have similar margins for which its impracticable to use other costing method. Its generally for small retailers as maintaining proper register is practically difficult for them and will work back with Backward Calculation by following formula: = S.P. Margin Admin/S&D Cost

NET REALISABLE VALUE: Net Realizable Value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated cost necessary to make the sale. Inventories are written down to net realizable value on an item-by-item basis except where it is appropriate to group similar or related items. An assessment of net realizable value is made as at each balance sheet date.

The valuation takes into consideration cost and selling price fluctuations directly relating to events occurring after the balance sheet date to the extent that such events confirm the conditions existing at the balance sheet date.

VALUATION FOR JOINT PRODUCTS: When cost of conversion is not separately identifiable, total cost of conversion is allocated on the rational and consistent basis. i.e.: allocation on the basis of relative sale value of product

VALUATION FOR BY PRODUCT: By products are valued at NRV which will be deducted from the cost of all products.

VALUATION OF RAW MATERIALS BELOW ITS COST: If, 1) Cost of R/M > Replacement Cost of R/M AND 2) Cost of Finished Goods > NRV of Finished Goods

DETERMINATION OF NRV: If the finished goods is sold at cost or above cost, then the estimated realizable value of raw material and supplies is considered more than its cost. If the finished product is sold below cost, then the estimated realizable value of raw material and supplies is equal to replacement cost of raw material or supplies.

EXCEPTION TO RULE OF COST OR NRV w.e. is Less: Its generally in case of WIP: For Eg: Cost incurred till date Further Exp required to be incurred Selling Price & Commission on Sale As per general provision, Cost incurred NRV [110-10-60]

Rs. 50 Rs. 60 Rs. 110 Rs. 10

= =

Rs. 50 Rs. 40

Therefore, Inventory is valued at Cost or NRV w.e. is lower i.e.: Rs. 40 But if in above ques, S.P. for the Semi finished g/s of the cost incurred till date is given @ Rs. 45, then general provision of Cost or NRV w.e. is lower is not to be followed and above inventory is to be recorded at Rs. 45 only and not at Rs. 40, because company will always try to avoid the future loss & will sell the Semi finished goods at present to avoid future loss of Rs. 5 [=45-40]

DISCLOSURE REQIREMENTS IN FINANCIAL STATEMENT: Accounting policies adopted in measuring inventories. Cost formula used. Classification of the above into raw materials and components, work in progress, finished goods, stores and spares, and loose tools.