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AS - 2 VALUATION OF INVENTORIES
Basics
This Standard should be applied in accounting for all inventories except the following :
(a) work in progress in the construction business, including directly related service contracts
(b) work in progress of service business (consulting, banking etc)
(c) shares, debentures and other financial instruments held as stock in trade
(d) Inventories like livestock, agricultural and forest products, mineral oils etc These inventories are valued at net realizable value
Definition
I. Definition of the Inventory includes the following:
A. Held for sale in the normal course of business i.e finished goods
B. Goods which are in the production process i.e work in progress
C. Raw materials which are consumed during production process or rendering of services (including consumable stores item)
II. Net Realisable Value (NRV):
“Net realizable value is 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”
Inventories should be valued at lower of cost and net realizable value. Following are the steps for valuation of inventories:
A. Determine the cost of inventories
B. Determine the net realizable value of inventories
C. On Comparison between the cost and net realizable value, the lower of the two is considered as the value of inventory. A comparison can be made the item by item or by the group of items.
Valuation
Cost of Inventories
The cost of inventories includes the following
i) Purchase cost
ii) Conversion cost
iii) Other costs which are incurred in bringing the inventories to their present location and condition.
Cost
Purchase
i) Purchase cost of the inventory includes duties and taxes (except those which are subsequently recoverable from the taxing authorities)
ii) Freight inwards
iii) Other expenditure which is directly attributable to the purchase
iv) Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase
Conversion
Cost of conversion includes all cost incurred during the production process to complete the raw materials into finished goods.
Cost of conversion also includes a systematic allocation of fixed and variable overheads incurred by the enterprise during the production process.
All the other cost which are incurred in bringing the inventories to the current location and condition. For (eg) design cost which is incurred for the specific customer order.
If there are by-products during the production of main products, their cost has to be separately identified. If they are not separately identifiable, then allocation can be made on the relative sale value of the main product and the by-product.
Other Cost
ASCERTAINING NRV
•Estimated Selling Price
LESS
• Estimated Cost of completion&
• Estimated Other cost necessary to effect the sale
NRV
All other items cost should be assigned by using the first-in, first-out (FIFO), or weighted average cost (WAC) formula.
Methods
Accounting policy adopted in inventory measurement
Cost formula used
Classification of the of inventory such as finished goods, raw material & WIP and stores and spares etc
Carrying amount of inventories carried at fair value less sale cost
Amount of inventories recognized as expense during the period
Amount of any write-down of inventories recognized as an expense and its subsequent reversal if any.