Objective :
1. Formulate the method of computation of cost of inventories( R.M, W.I.P & F.G.)
2. Determine the value of closing stock/ inventory for recognition in the Financial Statements as of any
cut-off date /year end
Scope of the Standard :
This standard deals with all inventories except the following :
● 1.Work-in-progress arising under construction contract including directly related to service contract
(AS-7 Construction contracts).
● 2.Work-in-progress arising in ordinary course of business for service providers (Incomplete
consultanc, Incomplete merchant bank activities, medical services in progress)
● . Financial Instrument held as stock-in-trade (Shares, Debentures, Bonds etc.)
● Producers’ inventories like livestock, agricultural and forest products, mineral oils, ores and gases.
Such inventories are valued at net realisable value.
Definition of Inventories
:
Inventories are defined as assets –
● Held for sale in the ordinary course of business (finished goods)
● . In the process of production of such sale (raw material and work-in-progress)
● In the form of materials or supplies to be consumed in production process or in the
rendering of services (stores,spares, raw material, consumables).
● Inventories do not include machinery
Finished goods and W/p valued at the following
Cost or Net Realisable Value(Expected
Selling price) which ever is lower
Cost formula- Cost of inventories
● FIFO
● LIFO
● WEIGHTED AVERAGE
If it is not practical to calculate,the following methods may be
used
● Standard cost
● Retail method
FIFO
● It is one of the method commonly used
to calculate the value of inventory on hand
at the end of an accounting period and the cost
of goods during the period.
● This method assumes that inventory purchased or manufactured first is
sold first and newer inventory remains unsold.
● Thus cost of older inventory is assigned to cost of goods is old and that
of newer inventory is assigned to ending inventor.
● First in first out method can be applied in both the periodic
inventory system and the perpetual inventory system
Advantages
● Simple and easy
● Closing stock valued nearer to current market price.
● Based on realistic assumption because the actual physical flow
two often follows the FIFO sequence
Disadvantages
● Embropper matching of goods with revenue since the cost of
goods sold is computed on the basis of old prices that are
possibly unrealistic.
● Difficult to compare two jobs using the same type of material if
different prices are charged.
LIFO
● Assumes that the materials are goods received a last in the stores
are the first to be issued or sold
● Therefore the cost of the units in the ending inventory is that of
the earliest purchase.
Advantage
● Ensure that the current revenues are matched with the recent
purchase, these resulting in realistic reported profit.
Disadvantages
● The balance sheet values of inventories is unrealistic as it does
not reflect current market conditions.
● Cost comparison of similar job is difficult.
Weighted average price method
● It gives due to weightage to quantities purchased and their purchase
price to determine the issue price.
Total cost of materials received
Weighted average price=. Total quantity purchased
Advantages
● It's more scientific and smoothen the fluctuation in purchase
price.
● Inventories valued at one rate.
Disadvantages
● Manipulation of income possible
Standard cost method
● . Under this method the cost is measured on the basis of
predetermined standards.
● Standards are regularly reviewed it necessary revised in the light
of current condition.
● Standard question may be used for convenience if the result
approximates the actual cost.
Retail method
● This method is applicable in the situation of retail trade,
inventories of large number of rapidly changing items,
impracticable to use other costing methods.
● Retail method may be used for convenience, if the result
approximates the actual cost.
● Measurement
Cost of inventory = sales value of inventory less
approximately grows margin percentage
Difference between ICDS and AS-2
