IAS 2 Inventories

Inventories shall be measured at the lower of:

(a) Cost (b) Net realisable value
taking each item of inventory separately (in practice each group/category of items separately).

Allowable costs per IAS 2

(a) The cost of inventories shall comprise all of the costs of purchase, costs of conversion
and other costs incurred in bringing the inventories to their present location and condition.
(b) Costs of purchase comprise purchase price, import duties and other taxes and
transport, handling and other costs directly attributable to the acquisition of finished
goods, materials and services, less trade discounts, rebates and other similar items.
(c) Costs of conversion include:
(i) Costs which are directly related to units of production, e.g. direct labour, direct
expenses and sub-contracted work
(ii) Systematic allocation of fixed and variable production overheads incurred in converting
materials into finished goods The allocation of fixed production overheads
to units of production is based on normal capacity (average over a number
of seasons under normal circumstances). In periods of abnormally high production
fixed overhead unit allocations are reduced to avoid valuing inventories above cost.
(d) Other costs can be included in the cost of inventories to the extent incurred in bringing the
inventories to their present location and condition

Net realisable value

Net realisable value: the estimated selling price in the ordinary course of business less:
(a) Estimated costs of completion, and
(b) Estimated costs necessary to make the sale (e.g. marketing, selling and distribution costs).
NRV < cost
The principal situations in which net realisable value is likely to be less than cost are where there
has been: (a) An increase in costs or a fall in selling price
(b) Physical deterioration of inventories
(c) Obsolescence of products
(d) A decision as part of a company’s marketing strategy to manufacture and sell
products at a loss
(e) Errors in production or purchasing

Interchangeable items
If various batches of inventories have been purchased at different times during the year and
at different prices, it may be impossible to determine precisely which items are still held at
the year end and therefore what the actual purchase cost of the goods was.
In such circumstances, the following estimation methods are allowed under IAS 2:
(a) FIFO (first in, first out):
The calculation of the cost of inventories on the basis that the quantities in hand
represent the latest purchases or production. OR
(b) Weighted average cost:
The calculation of the cost of inventories by using a weighted average price computed
by dividing the total cost of items by the total number of such items. The price is
recalculated on a periodic basis or as each additional shipment is received and items
taken out of inventory are removed at the prevailing weighted average cost.
The use of the LIFO (last in first out) method is not permitted.
Same cost formula must be used for all inventories having a similar nature and use to the entity
1
Q. 1 Superior Enterprises is engaged in the business of supplying four different products
to four different industries. The details relating to the movement of inventory and related
expenditures are as follows:

Opening stock Purchases Import Duties Sales

Items Qty Value Qty Value Refundable Non refundable Qty Value
A 30 60,000 360 810,000 120,000 90,000 350 1,015,000
B 60 90,000 780 1,560,000 200,000 150,000 800 2,080,000
C 40 120,000 560 1,820,000 250,000 200,000 580 2,320,000
D 80 200,000 600 1,650,000 350 1,155,000

The following information is available:

(i) The transportation charges upto the company’s godown are Rs. 100 per unit.
(ii) The transportation charges from the company’s godown to the customers’ premises are
approximately Rs. 150 per unit.
(iii) 25% of the closing stock of item A has been damaged due to mishandling and can only
be sold at 60% of its selling price.
(iv) A new product has been introduced by a competitor. It is similar to product C and is
being marketed at Rs. 3,200 per unit. The management of Superior Enterprises is of
the opinion that in future, it will also have to reduce the price of C to Rs. 3,500 per
unit.
(v) On October 1, 2007, 200 units of D had been pledged with a bank as security against a
short term loan which is repayable on March 31, 2008.
Required:
(a) Compute the value of the stock as at December 31, 2007, using any of the methods
allowed under IAS-2 “Inventories”.
(b) List the information that will have to be disclosed in the financial statements, to
comply with the requirements of IAS-2 “Inventories”. Marks: 12
(Answer: sotck Rs. 1192180)

Q2 XYZ Limited manufactures four products. The related data for the year ended 31-12-2009
is given below: A B C D
Opening Stock:
- Units 10,000 15,000 20,000 25,000
- Cost (Rs) 70,000 120,000 180,000 310,000
- NRV (Rs) 75,000 110,000 180,000 300,000
Production in units 50,000 60,000 75,000 100,000
Cost of goods manufactured (Rs) 400,000 600,000 825,000 1,200,000
Variable selling costs (Rs) 60,000 80,000 90,000 100,000
Closing stock (units) 5,000 10,000 15,000 24,000
Unit cost of purchase from market (Rs) 10.50 11.00 11.50 13.00
Selling price per unit (Rs) 10.00 12.00 12.00 12.50
Damaged units included in closing stock 300 6 800 1,500
Unit cost to repair damaged units (Rs) 3.00 2.00 2.50 3.50
Stock valuation method in use Weighted Avareage First In First Out

The company estimates the in January 2010 selling expenses would increase by 10%
Required: Marks: 15
Compute the amount of closing stock that should be reported in the balance sheet as on
31-12-2009. (Answer: Rs. 561,226)

2
Q. 3 Tufail Brothers Ltd, had imported chemicals worth Rs. 450 million from
Singapore at landed cost of Rs. 1,000 per k.g on January 2002. In the first
half of financial year selling price remained fixed at Rs. 2,000 per k.g and the
sales staff were able to sell 200,000 k.g. With effect from July 07, 2002
sudden drop of prices in international markets and reduction in duty tariff by
government forced Tufail Brothers to reduce the selling price at Rs. 1,600 per kg

On December 31, 2002, Stock worth Rs. 100 million valued at original landed
cost was unsold. Management of Tufail Brothers Ltd decided to further drop
selling price of chemicals at Rs. 800 per k.g in order to sustain the existing
market share. Accountant had estimated that overhead charges for selling the
chemicals were Rs. 50 per k.g (inclusive of transportation and labour charges
etc.). Salaries and commission paid during the year amounted to Rs. 10 million.

Required:
Keeping in view the requirements of International Accounting Standard
(IAS) 2 you are required to value the closing stock and calculate the amount
of profit earned by Tufail Brothers Ltd during the year ended
December 31, 2002. Marks: 06
(Answer: NP Rs. 237,500 Stock 75 M)

Q. 4 NKL Enterprises produces a single product. On July 31, 2008, the finished goods stock
consisted of 4,000 units valued at Rs. 220 per unit and the stock of raw materials was worth
Rs. 540,000. For the month of August 2008, the books of account show the following :
Rupees
Raw material purchases 845,000
Direct labour 735,000
Selling costs 248,000
Depreciation on plant and machinery 80,000
Distribution costs 89,560
Factory manager’s salary 47,600
Indirect labour 148,000
Indirect material consumed 45,000
Other production overheads 84,000
Other accounting costs 60,540
Other administration overheads 188,600

Other information are as under:

(i) 8,000 units of finished goods were produced during August 2008.
(ii) The value of raw materials on August 31, 2008 amounted to Rs. 600,000.
(iii) There was no work-in-progress at the start of the month. However, on August
31, the value of work-in-progress is approximately Rs. 250,000.
(iv) 5,000 units of finished goods were available in stock as on August 31, 2008.

Required:
Compute the value of closing stock of finished goods as on August 31, 2008 based on
weighted average cost method. Marks: 12

3
Q. 5 (a)Arham (Private) Limited started business on July 1, 2014. They are engaged in sales of
March engineering components, which are imported in the country.
2015 Assume following rates were applicable on invoice value at the time of import as per the
Federal budget:
Custom duty 20%
Income tax 6%
Sales tax 18%
Normal sales tax 15%
Additional sales tax @ 3% is also charged on imports, which is neither refundable nor
adjustable while sales tax and income tax are refundable/ adjustable.
After negotiations with a number of suppliers the company was finally able to strike a
deal with a foreign company and received first lot on January 1, 2015. By
January 31, 2015, 12,500 units were still in stock as a result of following imports:

January 1, 2015:
The company imported 10,000 units at an invoice price of Rs. 100 per unit and in
addition to payment of customs duty, income tax and sales tax, following costs were
also incurred at the time of imports:
Rs./ Unit
Carriage 2.00
Clearing charges to agent 1.00
Other related inventory costs allowed under IAS 2 for inclusion 9.00

January 15, 2015:

The company received another lot of 5,000 units of raw material. The supplier allowed
volume rebate and reduced invoice value by Rs. 10 per unit. The rates of Government
levies are same but a recent hike in prices has resulted the increase in clearing charges
to Rs. 2 per unit and other costs to Rs. 10.

January 20, 2015:

The company received another lot of 5,000 units of raw material. The supplier allowed
further volume rebate and reduced invoice value to Rs. 80 per unit while no more
changes in other expenses.
The Store In-charge is keeping accurate quantitative records of the inventory however,
due to limited accounting knowledge he is unaware as to inventory valuation and
believes that fair market value should be assigned to the inventory for valuation.

Required:
Assume you have been appointed as a Management Accountant in Arham (Private)
Limited and the management ask you to calculate the value of inventory as at
January 31, 2015 using first in first out (FIFO) method so that the company’s staff can
follow same principles for subsequent periods. 15
(Ans: Value of closing stock 1,523,000)