AS 2

Valuation of Inventories
Objective
• Determination of the value at which
inventories are carried in the financial
statements
• Determination of such value, including the
ascertainment of cost of inventories and
any write-down thereof to net realisable
value.
Scope
This AS 2 should be applied in accounting for
inventories other than:
• work in progress arising under construction
contracts
• work in progress arising in the ordinary course of
business of service providers
• shares, debentures and other financial instruments
held as stock-in-trade
• producers’ inventories of livestock, agricultural and
forest products, and mineral oils, ores and gases
Definition
Inventories are asset
• held for sale in the ordinary course of business
• 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 the
rendering of services.
Examples of Inventory
• merchandise purchased by a retailer and held for
resale
• computer software held for resale
• land and other property held for resale
• finished goods produced or work in progress
being produced, by the enterprise and include
materials, maintenance supplies, consumables
and loose tools awaiting use in the production
process
Definition
Net realisable value
• The estimated selling price in the ordinary course
of business less the estimated costs of
completion and the estimated costs necessary to
make the sale.
Definition
Cost of Inventories
• The cost of inventories should comprise all costs
of purchase,
• costs of conversion and
• other costs incurred in bringing the inventories
to their present location and condition
Definition
Cost of Purchase
• The costs of purchase consist of the purchase
price including duties and taxes
• freight inwards and other expenditure directly
attributable to the acquisition.
• Handling cost
• Trade discounts, rebates, duty drawbacks and
other similar items are deducted in determining
the costs of purchase
• Calculate cost of Purchase

• Purchase Price Rs 3000

• Primary Packing Rs 30
• Administrative expenses of purchase dept Rs 100
• Transport expenses Rs 150
• Storage cost Rs 200

• Not included Rs 100 and Rs 200

Definition
Costs of Conversion
Include costs directly related to the units of
production
• direct labour
• systematic allocation of fixed and variable
production overheads
Definition
Cost of Conversion
• Fixed production overheads are those indirect costs of
production that remain relatively constant regardless
of the volume of production

• Variable production overheads are those indirect

costs of production that vary directly, or nearly
directly, with the volume of production
Definition
Cost of Conversion
• Joint and By Product - costs of conversion of
each product are not separately identifiable -
they are allocated between the products on a
rational and consistent basis
Exclusions from the Cost of Inventories

• abnormal amounts of wasted materials, labour,

or other production costs
• storage costs, unless those costs are necessary in
the production process prior to a further
production stage
• administrative overheads - that do not
contribute to bringing the inventories to their
present location and condition
• selling and distribution costs
Techniques for the Measurement of Cost
• A variety of cost formulas is used to determine the cost
of inventories other than those for which specific
identification of individual costs is appropriate.

• Fairest possible approximation to the cost incurred in

bringing the item to its present location and condition

• Standard method, retail method

• FIFO, Weighted Average method
Writing down inventories cost
• The cost of inventories may not be recoverable if those
inventories are
• Damaged
• become wholly or partially obsolete
• Selling prices have declined

• written down to net realisable value

• item by-item basis
• group similar or related items.
Writing down inventories cost
Materials and other supplies held for use in
the production of inventories are not
written down below cost - if the finished
products in which they will be incorporated
are expected to be sold at or above cost.
Estimating the net realisable Value
• based on the most reliable evidence available at
the time
• take into consideration fluctuations of price
• cost 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
take into consideration the purpose for which the
inventory is held
Disclosure
The financial statements should disclose:
• the accounting policies adopted in measuring inventories,
including the cost formula used
• the total carrying amount of inventories and its
classification appropriate to the enterprise.
• Information about the carrying amounts held in different
classifications of inventories
• Raw materials and components
• work in progress
• finished goods,
• stores and spares
• loose tools.
Discussion 1
A company holds the following item in its stock.
Calculate the value of inventory

Material No. of Cost per Net

Realizable
Units unit (Rs) Value
A 200 10 12
B 300 5 4
C 500 7 6
Discussion - 2
• Raw material was purchased at Rs. 100 per kg. The
price of raw materials is declining. The finished goods
in which the raw materials are used are sold above
cost. 10,000 kg of raw materials are in stock at end of
the year. The replacement cost of materials is Rs. 82
per kg.
• How will you value the inventory?
Discussion 3

A company purchased 10,000 units of raw materials at

a cost of Rs 40 per unit on 1.05.2019. On 31.03.2020,
2000 units were unused. The expected sale value Rs.
50 per unit and commission at 10% on sale is payable
to the agent.

The company valued the stock at Rs 45. the state is this

correct. What would be the total carrying cost of raw
materials?
Discussion - 3
• In production process normal wastage is 5% of the
input.
• 5000 MT of input were put process resulting in a
wastage of 300 MT.
• The cost per MT of input is Rs. 1000
• The entire quantity of wastage is on the stock at end
of the year with nil realizable value.
• What is the cost per unit?
Discussion - 3
• Normal wastage is 5% of 5000 MT – which is 250 MT
• 50 MT is treated as abnormal wastage
• As per AS2 abnormal wastage of materials, labour and
other expenses will be removed form cost of inventory
and such costs are recognised as expenses in the period
in which they are incurred

• Cost per unit = Rs. 1000/4750 x 5000 = Rs. 1052.63

• The cost of abnormal wastage =
Rs.1052.63 x 50 = Rs. 52631.50
Discussion 4
Does Inventory include machinery spares?

Does inventory include stock of packages and

empties?
Discussion 5
• The cost per kg of finished goods consists of

• Material Cost Rs. 100 per kg

• Direct Labour Cost Rs. 20 per kg
• Variable Production overheads Rs. 10 per kg

• Fixed production overheads for the year on normal production

capacity of 1,00,000 kg is Rs. 10,00,000.
• The actual production was 99,000 kg. out of which 2000 units
of stock are at end of the year.
Discussion 5
• Cost of conversion include variable and fixed production
overheads.
• The allocation of fixed production overheads is based on
the normal production capacity

• The cost of finished goods are valued as follows

• Material Cost Rs. 100 per kg
• Direct Labour Cost Rs. 20 per kg
• Variable Production overheads Rs. 10 per kg
• Fixed Production overheads Rs. 10 per kg

• Value of Finished goods in stock is 2000 x Rs.140 = Rs.

2,80,000
Discussion 6
X Ltd., purchased goods worth Rs. 40 Lakhs during October
2002. Till end of March 2003 75% of the goods were sold.
The expected sale value of stock available is Rs. 11 lakhs. A
commission of 10% on sale needs to be paid to the agent.
Estimate the value of closing stock as on 31 March 2003.
Discussion 6
• Cost Price closing stock is Rs. 10 lakhs (25% of Rs. 40 Lakhs)
• Net Realizable value
• Sale price = Rs. 11,00,000
• Less Commission = Rs. 1,10,000
• NRV = Rs. 9,90,000

• As per AS Inventory is to be valued at lower of cost or net

realizable value.

• Value of Inventory is Rs. 9,90,000