AS 2 (Revised) : Valuation

of Inventories
 AS 2 deals with

Joint Product
Valuation of
What are Applicability and By
Inventories
Inventories? Product

Inventories are ASSETS held

• For sale in the ordinary course of business; or
• In the process of production for such sale; or
• In the form of materials or supplies to be consumed in
the production process or in rendering of services.
 AS 2 is not applicable to

WIP in WIP in case Producer’s

Shares, Inventory of
Construction of Service
Debentures Livestock,
Contracts Providers
and other Agricultural
(AS 7)
financial and forest
instruments Produces,
held as Stock and mineral
in Trade. oils, ores
and gases.

NOTE:
1. Land and Property held for resale; and
2. Stores, Spares and Stand By Equipment, which does not qualify as per
AS 10 (PPE);
Will be included in the Scope of Inventories.
VALUATION OF INVENTORIES

WIP and FG
RAW
MATERIALS

Valued at
COST; or
NRV;
Whichever is less.
 How to Calculate COST?
(WIP & FG)

Purchase
All OTHER
Cost (PC) Conversion Cost Expenses
incurred to bring
Purchase Direct Material(PC) the inventory to
Price Add: Labour Costs the present
Less: Trade Add: Variable Location and
Discounts Production Condition
Add: Non Overheads
Refundable Add: FIXED For Example:
Taxes OVERHEADS Specific
Add:
Designing Costs,
Carriage
Packing Costs
Inward
Allocation of Fixed Overheads
Fixed OHs will be Allocated on NORMAL CAPACITY.
However, if ACTUAL PRODUCTION > NORMAL CAPACITY
Then, allocation shall be done on actual production basis so
that Inventories are not valued ABOVE COST.
For example:
Fixed OHs = 100,000
Normal Capacity = 10,000 units
Actual Production
i. 4,000 units iii. 12,000 units

i. Fixed OHs per Unit = 1,00,000/10,000 = 10/unit.

Actual Production = 4,000 units * 10 = `40,000 (Maximum Cost that
can be Charged to INVENTORIES)
Balance 60,000 will be charged to P&L.

i. ii. Fixed OHs per Unit = 1,00,000/10,000 = 10/unit.

Actual Production = 12,000 units * 10 = `1,20,000 (Maximum Cost
that can be Charged to INVENTORIES is 1,00,000)
Hence, Fixed OHs per unit = 1,00,000/12,000 = 8.5/unit.
Costs Excludes
• Abnormal Losses;
• Storage Costs, unless necessary in
Production process;
• Admin Overheads;
• S & D Overheads;
• Interest on Borrowing, unless AS 16
allows;
What is NET REALISABLE VALUE?

Estimated Estimated Estimated

Selling Price Costs to COSTS to make
complete the Sale
the product
(only in
WIP)

For Example:
Car Dealer, purchased an AUDI for 50 Lakhs.
Estimated Selling Price is 80 Lakhs.
But, to make the sale, free services are required to be given, exchange
discount is required to be given which all costs for 3 Lakhs.
Therefore, actual realizable value of the Car is 80 Lakhs – 3 Lakhs = 77
Lakhs
Valuation of Raw Materials
Normally the RM is be Valued at Cost.
But,

If, Finished Goods for

If, Finished Goods for
which RM will be used
which RM will be used
will sell BELOW COST
will sell at COST or
then,
ABOVE COST then,

Raw Material will be

Raw Material will be
Valued at
Valued at COST.
REPLACEMENT COST.

REPLACEMENT VALUE = Amount that the entity have to pay for

Replacing the Asset accounting to its current worth.
JKSC QUESTIONS
METHODS OF DETERMINING COST

If Goods are Non

Ordinarily
Interchangeable, If Goods are Ordinarily
then Value the Interchangeable, then Value the
goods using, goods using,

Specific 1. FIFO Method;

Identification 2. Weighted Average Method
Method. 3. Adjusted Selling Price
Method
For Example: 4. Standard Cost Method.
Customised Jewelry
For Example: Cloth in Shirt
Manufacturing Company
 JOINT PRODUCTS AND BY PRODUCTS

What are Joint Products?

Two or more main products received out of the SAME
input. Hence such COST of INPUT is required to be
charged to the JOINT PRODUCTS in a reasonable way.
The best possible way is in the Ratio of Sale Value of
the JOINT PRODUCTS.

Calculation of Joint Cost:-

Direct Material + Direct Labour + OHs x
Less: NRV of By Product (x)
Less: Sale of Scrap/ Waste (x)
Net Joint Cost x
DISCLOSURE
(REFER JKSC MATERIAL)