ACCOUNTING STANDARD 2 VALUATION OF INVENTORY

ASSETS BASED ACCOUNTING STANDARDS

UNIT 1: ACCOUNTING STANDARD 2 VALUATION OF INVENTORY

After studying this unit, you will be able to comprehend 

• the Definition of Inventory; 
• Measurement of Inventories; 
• What is included in Cost of Inventories; 
• Exclusions from the Cost of Inventories;
•  Cost Formulas; 
• Techniques for the Measurement of Cost 

INVENTORY

Inventory for sale in the Ordinary course of business ( Stock in trade , Finished goods ) in the process of production for such sale.

NOTE - 

1. Inventories does not include 
2.  Spare parts;
3. Servicing equipment & stand by equipment                        

stand by equipment - equipment which is kept for backup use , If primary equipment 

fails 

      4.Plant and equipment

These items are accounted in Accounting Standard - 10

Measurement of Inventories

Inventories should be valued at lower of cost and net realisable value.

 

For example - If you have an item that costs $100, but you can only sell it for $80, you should value the item at $80 because it is less than the cost.

What is included in Cost of Inventories

Cost of Inventories = Cost of purchase  +  Cost of conversion  +   Other cost incurred in bringing the inventory to their present location and condition

Cost of conversion - the total expense of turning raw materials into finished products. It includes labor costs and factory overheads but excludes the cost of raw materials.

 Other cost incurred in bringing the inventory to their present location and condition - These are the cost needed to get inventory is in the right place and in good condition.

Cost of purchase - The cost of purchase includes the price paid for the item plus any duties, taxes, and other expenses directly related to buying it. Trade discounts, rebates, and refunds are subtracted from this cost.

Computation of Cost of Purchase

Purchase Price ............................... XXX  

Add: Duties and Taxes .................. XXX  

Add: Other Expenditure  

Directly Attributable  

to the Acquisition ..........................XXX  

Less: Trade Discount and Rebate .(XXX)  

------------------------------------------------  

COST OF PURCHASE ................XXX

---

Fixed overhead - it is a expenses or cost that don't change even if a business produces more or less.

NRV ( Net realizable value ) is how much you can actually make form selling something after you substract the cost to finish and sell it.

Example - Estimated selling price   150

                   cost to finished product   20

                   cost to sell                        10

now, 150 ( selling price) -  20 ( cost to finished product ) - 10  ( cost to sell ) 

                 = 120

Therefore, NRV is 120

EXAMPLE 1

Cost of a partly finished unit at the end of 20X1-X2 is 150. The unit can be finished next year by a further expenditure of 100. The finished unit can be sold at 250, subject to payment of 4% brokerage on selling price. Assume that the partly finished unit cannot be sold in semi-finished form and its NRV is zero without processing it further. 

The value of inventory will be determined as below:

Estimates Selling Price:                               250  

Less: Brokerage (4% of 250):                      (10)  

Less: Cost of Finished Product:                   100  

Net Realisable Value (NRV):                       140

Given Cost of Inventory:                             150

Therefore, Lower of Cost 

and Net Realisable Value:                           140