CHAPTER

4
VALUATIONOF INVENTORIES

(AS-2)

Objective
standard is to formulate
the method of comnu
The objective of this
inventories/stock, determine the
value of closing stock/
tillitis
tation of cost of inventory is to be shown in balance sheet
inventory at which, the revenue.
not sold and recognized as
Definition
following:
4.2 Inventories consist of the business (finished goods)
in the ordinary course of
" Held for sale
process of production of such sale (raw material and work.
" In the
in-progress)
be consumed in production
" In the form of materials or supplies to(stores,
process or in the rendering of services spares, raw material,
consumables). Inventories do not include machinery.
4.2-1Accounting for spare parts and servicing equipments -Inventories
consists of goods purchased and held for resale. For example, merchan
dise purchased by a retailer and held for resale, computer software held
for resale, or land and other property held for resale. Inventories also
consists 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.
Inventories do not include spare parts, servicing equipment and standby
equipment which meet the definition of property, plant and equipment
as per AS-10, Property, Plant and Equipment (PPE). Such items are
accounted for in accordance with AS-10. The stand-by equipment is
separate PPE and should be depreciated like any other PPE. a
Machinery spares, which are not
asset but can be used generally forspecific to a particular item of fixed
be treated as inventories for the various items of fixed assets, shoud
purposeof AS-2. Such machinery spar
60
61 WHAT IS COST OF INVENTORIES Para 4.6

should be charged tothe statement of profit and loss as and when issued
for consumption in the ordinary course of operations.
Applicability
4.3 Accounting Standard-2 is not applicable in following cases :
" Work-in-progress arising under construction contract including
directly related to service contract (AS-7 Construction contracts).
" Work-in-progressarising in ordinary course of business for service
providers (Incomplete consultancy services,Incomplete merchant
bank activities, Medical services in progress)
Financial Instrument held as stock-in-trade (Shares, Debentures,
Bonds etc.)
" Producer's inventories like livestock, agricultural and forest pro
ducts, mineral oils,ores and gases. Such inventories are valued at
net realisable value.
Measurement of Inventories
4.4 Inventories should be valued at lower of cost and net realisable value.
4.5 Major points for valuation of Inventories :
Determination of cost of inventories.
" Determination of net realisable value of inventories.
" Comparison between the cost and net realisable value.
What is Cost of Inventories?
4.6 Cost of inventory includes
Cost of purchasek
Cost of conversion
" Other costs (incurred in bringing the inventories to their present
location and condition)
4.6-1 Cost of Purchase - Cost of purchase includes
s Purchase price
Duties and Taxes
YFreight inward
" Other expenditures directly attributable to the acquisition.
Less:
Duties and taxes recoverable by enterprises from taxing authorities
Trade discount
Rebate
Duty drawback
" Other similar items.
Para 4.7 VALUATION OF INVENTORIES
62
4.6-2 Cost of coversion :Itconsists of the cost directly related to
units (ie Direct Labour, Direct Material, Direct Expenses) + Systemati
Allocation of fixed and variable production overheads that are incurr
in converting material into finished goods:
" Fixed production overhead: Indirect cost of production that r
mains relatively constant regardless of volumeof production (ie
Depreciation and Maintenance of factory building, cost of factor
management).
" Variable Production Overhead: Indirect cost of production
that
varies directly or nearly directly with the volume of production (ie
indirect material, indirect labour).
" Allocation of fixed production overhead: On
normal capacity. In
periods of abnormally high production, the amount
duction overheads allocated to each unit of productionofis fixed pro
by allocating it using actual production so that decreased
measured above cost. inventories are not
Allocation of variable production overhead: On actual
" In case of joint-products: When the production.
product is not separately identifiable, cost of conversion of each
total cost of conversion is
allocated between the products on the rational and consistent basis
(ie. allocation on the basis of relative
" In case of by-product: If
sale value of product).
not of material value, theyby-products, scrap or waste materials are
then net realisable value is are measured at net realisable value,
deducted from cost of conversion. Net
cost of conversion (i.e. cost of
conversion - net realisable value) is
distributed among the main products.
4.6-3 Other costs :Cost incurred
present location and condition. in bringing the inventories to their
Exclusions from cost of Inventories
4.7 Following costs are
excluded from the cost of
Abnormal amounts of wasted materials, Inventories:
Costs labour, other production
" Storage cost
" Administrative overhead
" Selling and distribution cost
" Interest and borrowing cost.
be included it, can However,
form part of the cost.if AS-16allows such cost to
63 WHAT IS NET REALISABLE VALUE Para 4.10

Cost formula

4.8-1 Specificidentification method for deternining cost of inventories

- Specific identification method means directly linking the cost with
specific item of inventories. This method has application in the following
conditions :
" In case of purchase of item specifically segregated for specific
project and is not ordinarily inter-changeable.
" In case of goods or services produced and segregated for specific
project.
4.8-2 Where specific identification method is not applicable - Where
Specific identification method is not applicable, the cost of inventories
is valued by the following methods :
,* FIFO (First In First Out)
YWeighted Average cost.
Cost of inventories in certain conditions
4.9 When it is impractical to calculate the cost, the following methods
may be followed to ascertain cost:
" Standard Cost
" Retail Method
These methods may be used for convenience if the results approximate
actual cost.
4.9-1 Standard Cost -It takes into account normal level of consumption
of material and supplies, labour, efficiency and capacity utilization. It
must be regularly reviewed and revised taking into consideration the
current condition.
4.9-2 Retail Method - It is generally used in retail business, when it is
difficult to ascertain cost of individual item. It is applicable when itemns
of inventories are rapidly changing items and have similar margins and
for which it is impracticable to use other costing method.
Under this method, the cost of inventory is determined by reducing from
the sale value of inventories the approximate percentage of
gross
margin. The percentage used takes into consideration the inventory that
has been marked down tobelow its original selling price.
What is Net Realisable Value?
4.10 Net realisable value means the estimated selling price in ordinary
course of business, less estimated cost of completion and estimated cost
necessary to make the sale. Net realisable value is estimated on the basis
of most reliable evidence at the time of valuation. Estimation of net
 64
Pars 4.13 VALUATION OF INVENTORIES
realisable value also takes into account the purpse for which the
inventory is held. Estimationof net realisable value is made as at each
balance sheet date.
Estimation of net reallsable value
4.11Thenet realisable value of the materials and other suplies held for
use in production of finished goods is estimated as under.
" If finished product in which raw materíal and supplies used is sold
at cost or above cost, then theestimated realisable value of raw
material and supplies is considered more than its cost. Therefore
inventories of raw material willbe valued at cost.
" If finished product in which raw material and supplies used is sold
below cost, then the estimated realisable value of raw materíal or
supplies is equal to replacement price of raw material or supplie
and this raw material will be valued at replacerment price.
Comparlson between cost and net reallsable value
4.12 The comparison between cost and net realisablevalue should be
made item by item or by group of items.
Disclosure in the financial statement
4.13 The financial statement should disclose the following:
" Accounting policy adopted in measuring inventories,
"Cost formula used.
"Classifications of inventories are,
(a) Raw materials and components
(h) Work-in-progress
(0 Finished goods
(d) Stock-intrade (in respect of goods acquired for trading)
() Stores and spares
5 Loose tools
(9 Others (specify nature)
 DISCLOSURE IN THE FINANCIAL STATEMENT Para 4.13
65

SUMMARY AS-2

Inventories

Objective Scope Measurement of inventories

Determination
Not applicable to - Lower of cost or realizable
of cost and Construction contract value
Realisable value Financial instruments
Biological assets

Cost Realizable value

" Cost of purchase Estimated selling price
Cost of conversion Less
" Bringing cost Estimated cost of completion or estimated
cost to make sale

Cost of purchaseCost of conversion Bringing cost Exclusion from cost

Purchase costless Direct material and To bring inven " Interest cost
trade discount/ labour cost |tory at present " Storage cost
rebate + Non-re-|" Fixed overhead atlocation and " Selling and distribu
fundable duties & normal capacity condition (Not tion cost
taxes Less - Value of any by- carrying/main " Abnormal cost
product tenance cost)

Cost formula
" FIFO
" Weighted cost

Cost of inventory of service

provider Cost of agriculture produce harvested
At cost Fair value less cost to sell (As peris
GAAP)

Disclosures

Classification of inven
tories
Carrying value
" Cost formula
 VALUATION OF INVENTORIES
66
ILLUSTRATIONS
Q1. nduga Ltd. manufacture conputers, during the year ended 31st March. 20Io
the company manufactured 550 computers, it has the policy of valuing finishe
stock of goods at astandard cost of 1.8 lakhs per computer. The details of the cns
are as under:

Raw material consumed

Rin lakhs)
Direct Labour 400
Variable production overheads 250
Fixed production overheads 150
290
(Enchuding interest of 100 lakhs)
Compute the value of cost per computer for the purpose of closing
Solution: As per AS-2 (Revised) (refer point 4.6), on valuation stock.
finished stock of goods should be valued on the basis of of Inventories,
absorption
absorbing fixed production overheads the normal production costing. While
ered. In this case finished stock has been valued at a capacity is consid
per computer which incidentally synchronizes with the standard cost of 1.8 lakhs
basis of absorption costing as under: value computed on the
Materials (in lakhs)
Direct Labour 400
250
Variable production overheads
Fixed production overheads 150
Less: Interest 290
Total Cost 100 190
990
Number of computers produced 550
(Assumed to be normal production)
Cost per computer 990/550=-* 180 lakhs
Policy of the company to value closing stock is not as per
AS-2. As per para 18 of
AS-2, (refer point 4.9-1) the techniques of standardl cost method
convenience if the result approximates to the actual cOst and may be used for
regularly reviewed if necessary. In the instant case, the cost of standard cost is
conveniently calculated as per absorption costing. Therefore, inventory can be
that standard costing method should be adopted. there is no
reason
Q2. Raw material was purchased at 100 per kg. Price of raw naterial is
decline. The finished goods in wvhich the raw naterial is incorporated are on the
to be sold at below cost. 10,000 kgs. of raw material is in stock at expected
Replacement cost is 80 per kg. How willyou value the inventor? the year-end.
Solution: As per para 24 of AS-2 (refer point 4.11), on valuation of
material and other supplies held for use in the production of inventoriesinventories,
written down below cost if the finished products in which they will be incorpo are not
to be sold at or above cost. However, when
decline in the price of materials and it is estimated that the costthere
rated are expected
Iof ththehasfinished
been a
products will exceed net realisable value, the materials are written down to net
realisablevalue. In such circumstances, the replacement cost
measure of their net realisable value.
ofthe
t material may
be the best available
 ILLUSTRATIONS
67

Henceinthiss case,the stock of 10000kgs. of raw material will be valued at t 80 per

The. inished goods, if on stock, should be valued at cost or net realisable value,
kg.
whichever is lower.
production process, normal waste is 5% of input. 5000 MT of input were
03.In a s resulting
process in a wastage of 300 MT. Cost) per MT of input is I, 000. The
putin of waste is on stock at the year end. If waste has Nil realisable value.
quantity
entire
What is the cost
per unit ?
Solution: As per para 13 of AS-2, (refer point 4.7) abnormal amounts of waste
materials. Jabour or other production costs are excluded from cost of inventories
nd such costs are recognized as expenses in the period in which they are incurred.
In this
case, normal wasteis 250MT and abnormal waste is 50MT. Cost per unit
1000 X 5000) 4750 = 1052.63.
ecost of 250MT willbe included in determining the cost of inventories (finished
52631.50
goods) at the vear-end. The cost of abnormal waste amounting to
sOMT X R1052.63) will be charged in the profit and loss statement.
= 1052.63.
Cost per unit = 5000X 1000/4750
04. How will youvalue the inventory per kg. of finished goods consisted of:
Materialcost 100 per kg.
Direct Labour cost 20 per kg.
Direct variable production
overhead 10per kg.
capacity of one lakh kgs. is
Fixed production charges for the year on normal the year-end.
z10 lakhs. 2000 kgs. of finished goods are on stock at
AS-2, (refer point 4.6) the costs of
Solution: In accordance with paras 8 & 9of fixed and variable production
conversion include a systematic
allocation of
converting materials into finished goods. The
overheads that are incurred in in the
allocation of fixed production overheads for
the purpose of their inclusion
facilities.
normal capacity of the production
cost of conversion is based on the
Thus, cost per kg. of finished goods can
be computed as follows:
100
Material cost 20
Direct Labour cost 10
overhead
Direct variable production 10,00,000/100000) 10
Fixed production overhead ( 140

year-end will be
value of 2000 kgs. of finished goods on stock at the
Thus,the
72,80,000 (2000 kgs. X 140) during
energy saving equipment (Windmill towers)
Q5. XYZ Ltd. has fabricateddrawing supplied by the customer. However due to
a
Z008-09 as per design and postponement in
customer has requested the company for of finished
liquidity crunch, the company to withhold the
delivery
requested the
delivery schedule and remaining tems.
suspend the production of the
goods products and
of customer balance and the goods held bygiven
the details on 31-3-2010 are
As a result of the above,
work-in-progress and finished goods as
tompany as 75 lakhs
below:
Sundry Debtors Balance (Windmill Towers) 120 lakhs
0)
(i) Windmnill Towers (finished goods)
97 lakhs

(i) Windmill Towers (WIP)

 VALUATION OF INVENTORIES
6

The petition for winding up against the customer has been filed during 2009.-2010)
by XYZ Ltd.
The Auditors of XYZ Lid. have qualified the accounts stating
292 lakhs included in Sundry Debtors, finished goods and
non-pprovision of
(WIP). work-in-progress
Whether the qualification of Auditors is correct. Comment with explanation,
Solution: As per para 5 of AS-2 (refer point 4.10), inventory should be valued
lower of cost and net realisable value. As this is the case of specific orderinvento
the cost of this inventory willbe based on specific cost. The cost mentioned in th
question is presumed to be specific cost. However, the net realisable value of.
inventory cannot be readily available from the market as there is no readymarke
for specific order inventory. Considering that the company has filed a windingun
petition against the customer, there is sufficient evidence that realisable val
the inventory which is made on specificorder and only suitable for particular
customer will be negligible. Thereforeas per para 5 of AS-2 the inventory has to
be valued at realisable value which appears to be negligible, hence the qualification
of auditor appears to be in order.
As regards sundry debtors of 75 lakhs, these have.to be shown in the financil
statements at their realisable value. Again there is a sufficient evidence of non
realization of debtors as the company has filed the winding up petition against the
debtors. Hence, the provision for losses of 75 lakhs should be made and
qualification of auditors also appears to be in Order.
Q6. Acompany produced the main products Xand Yand one by-productZ emerges
from the production process apart from waste. Cost description of the production
process is hereunder:
Item Unit Output Closing stock as
on 31-3-2011
Raw Material 10,000 1,00,000 X=4000 unit 500
Wages 50,000 Y= 3000 unit 100
Fixed overhead 50,000 Z= 1000 unit
Variable overhead 000930,000
Scrap realization is 2, 000.By-product (Z) is sold @20 per unit. There is separate
processing charge of 2,000, packing of by product cost 3,000, reasonable profit
on by-product after separate processing is 2000. Average market price of Xand Y
is T60 per unit ande40 per unit, respectively. Calculate the value ofclosing stock
of X and Yproducts.
Solution:
Cost element Total X Y Z
Cost
Raw material 100,000
Less: Scrap 2,000
98,000
15,000
Less: Cost of by-product 15,000
83,000
69
ILLUSTRATIONS

Cost element Total X

Cost
Add:

Wages 50,000
Fixed overheads 50,000
Variable overheads 30,000
Distributed in 2: 1ratio,
X(60 X 4000) : Y(40 X 3000) 213,000 142,000 71,000
Cost of by-product at the point of separation:

Sale price by-product 20,000

Less:

Separate processing 2,000

Packing 3,000 5,000
15,000
Closing Stock Valuation:
X Y

(a) Total cost 142,000 71,000

(b) Numbers of unit produced 4,000 3,000

500 100
() Closing stock
Value of closing stock (a/b >Xc) 17,750 2,367

Q7. GM Ltd is a car manufacturer. It ordered 20,000 units of car axles at 1,200
(including 200 GST) per unit. Freight incurred for theorders order stood at
loss on such amounts
?20,000. It has been observed that normal transit con
17,900 were
upto 5%. It actually received 18,900 units of car axles of which
sumed.
amount of abnormal loss as
Youare required to compute cost of inventory and
suming ITC is fully admissible for GST paid.
Solution:
Amt. )
X? 1200) 2,40,00,000
Purchase price of car axles (20,000units
(40,00,000)
Less: ITC(20,000 units X 200)
2,00,00,000
20,000
Add Freight 2,00,20,000
Total raw materialcost
 VALUATION OF INVENTORIES

Total number of units after normal transit loss =20,000 X95% = 19,000
Actual quantity of units received = 18,900 units
Abnormal loss units = 19,000-18,900 = 100 units
Revised cost per unit = 2,00,20,000/19,000 = 1,054
Closing stock units= 18,900-17,900 = 1,000 units
Valuation of closing stock =1,000 units X 1,054 = 10,54,000
Amount of abnormal loss = 100 units X 1,054 = 1,05,400
Q8. Mr. Rakshit givesthe following information relating to items forming part af
inventory as on 31st March, 2019. His factory produces product X using ro
materialA.
6) 800 units of raw material A(purchased@140 per unit). Replacement cos
of raw material Aas on 31st March, 2019 is 190 per unit.
(i) 650 units of partly finished goods in the process of producing X and cost
incurred till date 310 per unit These units can be finished next year b
incurring additional cost of ? 50 per unit.
(i) 1,800 units of finished product Xand total cost incurred t 360per unit.
Expected selling price of product X is 350 per unit.
In the context of AS-2, determine how each item of inventory will be valued as
on 31st March, 2019. Also, calculate the value of total inventory as on 31st March,
2019.
[CA Inter Group I, Nov 2019]
Solution: As per AS-2 (Revised) "Valuation of Inventories", 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 cost or above cost. However, when there has beena decline in the price of
materials and it is estimated that the cost of the finished products will exceed net
realizable value, the materials are written down to net realizable value. In such
circumstances, the replacement cost of the materials may be the best available
measure of their net realizable value. In the given case, selling price of product X
is 350 and total cost per unit for production is 360.
Hence the valuatíon will be done as under:
() 800 unitsof raw material will be valued at cost 140.
(i) 650 units of partly finished goods will be valued at 300 per unit Le. lower of
cost (3 10)or net realizable value 300 (Estimated selling price? 350 perunit
less additional cost of 50).
(iü) 1,800 units of finished product X will be valued at NRV ofT 350 per unit since
it is lower than cost 360 of product X.
 ILLUSTRATIONS
71

Valuation of Total Inventory as on 31.03.2019:

Units Cost () NRV/ Value units X cost
Replacement or NRV whichever is
Cost (3) less ()
Raw material A 800 140 190 1,12,000 (800 X 140)
Partly finished goods 650 310 300 1,95,000 (650 X 300)
Finished goods X 1,800 360 350 6,30,000(1,800 X350)
Value of Inventory 9,37,000
Mote: It has been assumed that the partly finished unit cannot be sold in semi
ished form and its NRV is zero without processing it further.
0.9Mr. Jatin gives the following information relating to the items forming part of
the izventory as on 31.03.2019. His enterprise produces product P using Raw
Material X.
) 900 units of Raw Material X(purchases @100per unit), Replacement cost of
Raw Material X as on 31.03.2019 is 80 per unit.
fi) 400 units of partly finished goods in the process of producing P. Cost incurred
till date is 245 per unit. These units can be finished next year by incurring
additional cost of 50 per uriit.
fi) 800 units of Finished goods Pand total cost incurred is 295 per unit. Expected
selling price of productPis 280 per unit, subject to apayment of 59% brokerage
on selling price.
Determine how each item of inventory will be valued as on 31.03.2019.
Also calculate the value of total lnventory as on 31.03.2019.
[CA Inter Group I, Jan. 2021]
Solution: As per AS 2 (Revised) "Valuation of Inventories", 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 cost or above cost.
However, when there has been a decline in the price of materials and it is estimated
that the cost of the finished products will exceed net realizable value, the materials
arewritten down to net realizable value. In such circumstances, the replacement
cost of the materials shall be the net realizable value. In the given case, selling price
of product P is 266 and total cost per unit for production is 295.
Hence the valuation willbe done as under:
(9 900 units of rawmaterialX will be written downto replacement cost as selling
unit.
price of finished product is less than itscost, hence valued at 80 per
unit ie, lower of
() 400 units of partly finished goods will be valued at 216 perprice 266per unit
cost ( 245) or Net realizable value 216(Estimated selling
less additional cost of 50).
unit since
800units of finished product P will be valued at NRV of R266 per
it is lower than cost 295.
 VALUATION OF INVENTORIES
72
Valuation of Total Inventory as on 31.03.2019:
Units Cost () NRV/ Value = units
Replacement Xcost or NRV
cost whichever is
less )
Raw material X 900 100 80 72,000
Partly finished goods 400 245 216 86,400
Finished goods P 800 295 266 2,12,800
Value of Inventory 3,71,200
Q.10Joy Ltd. purchased 20,000 kilogranms of Raw Material @20 per
during the year 2020-21. They have furnished you with the followingkilogram
further
information for the year ended 31st March, 2021:
Particulars Units Amount )
Opening Inventory:
Finished Goods 2,000 1,00,000
Raw Materials
2,200 44,000
Direct Labour
3,06,000
Fixed Overheads
3,00,000
Sales
20,000 11,20, 000
Closing Inventory:
Finished Goods
2,400
Raw Materials
1,800
Theplant has a capacity to produce 30,000 units of
However, the actual production of finished finished product per annum.
products
20,400 units. Due to a fall in the market demand, theduring the year 2020-21 was
in which theraw naterial has been utilized price of the finished goods
The replacement cost of the raw material was is expected to be sold @40 per unit.
19 per kilogram.
You are required to ascertain the value of closing
as per AS 2. inventory as at 31st March, 2021
Solution:
o[CA Inter Group I, July, 2021]
Finished Goods produced during the year -
Sales
20,000
Closing Inventory of Finished Goods
Total 2,400
22,400
Opening Inventory of Finished Goods
utilas (2.000)Slon
Production during the year
20,400
73 ILLUSTRATIONS

Raw Material Consumed .

Opening Inventory of Raw Material 2,200
Purchased
20,000
Total
22,200
Closing Inventory of Raw Material (1,800)
Raw Material Consumed during the year 20,400
Computation of Cost of Finished Goods produced during the year
Raw MaterialConsumed (20,400 x20) 4,08,000
Direct Labour
3,06,000
Fixed Overhead [(3,00,000/30,000) x20,400] 2,04,000
Total Cost of Production 9,18,000
Cost of Finished Goods per unit =9,18,000/20,400=45.
As per AS-2,closing inventory shall be valued at its cost or net realisable value,
whichever is less. In case of finished goods, its cost is 45 per unit and its selling
price is 40 per unit. Thus, the closing inventory of finished goods shall be
measured at lower of the two values ie 40 per unít. (Note- We have assumed
FIFO method and thus the opening inventory of finished goods is assumed to
have been sold first.)
With regards to valuing the closing inventory of raw material which is to be used
in production of finished goods, if the finished goods are sold below its cost, then
the NRV of the raw material is the replacement price of the raw material iet 19
per unit Now, the cost of raw material isT20 per unit and its NRV is? 19 per unit.
Thus, the cosing inventory of raw material shall be valued at lower ofthe two
values Le 7 19 per unit.
Thus, the value of closing inventory will be as under
Finished Goods (2,400 units @40 per unit) 96,000
Raw Materials (1,800 kg @19 per kg) 734,200
Total 71,30,200

0.11 SMEnterprises is a leading distributor of petroL Adetail inventory of petrol

in hand is taken when the books are closed at the end of each month. For the end
momth of Jume 2021 following information is available:
6) Sales for the month of Jane 2021 was 30,40, 000.
i) General overhead cost 4,00,000.
) Iventory at beginning 10,000 litres @92 per litre
fiv) Purchase -Jone 1st 2021, 20000 litres @90per litre, June 30th 2021, 10,000
litres @95 perlitre.
) Closing inventory 13,000 litres.
1ou are required to compute the following by FIFO method as per AS-2
) Value of Inventory on 30th hne, 2021.
 VALUATION OF INVENTORIES

() Amount of cost of goods sold for June, 2021.

(t) Profit/Loss for the month of June, 2021.
[CAInter Group I, May 202)
Solution:
() Value of Inventory on 30th June, 2021 -
In the given question, total quantity available during the month is 40 0e
litres of petrol (Le. 10,000 + 20,000 + 10,000) and the closing inventory i
13,000 litres. So, 27,000 litres of petrol has been sold during the month N
as per FIFO method, we shalldeduce that the opening inventory of 10.00
litres has been sold and further 17,000 litres of petrol has been sold from th
purchases made on lst June, 202 1.
Thus, the value of closing inventory shall be =
(3,000 litres x90 per litre) + (10,000 litres x*95per litre) = 12,20,000.
(i) Amount of Cost of Goods Sold -
Cost of Goods sold = (10,000 x*92 per litre) + (17,000x? 90 per litre) =
24,50,000.
Note: As per AS-2, General Overhead Cost of 4,00,000 shall not be included
in the cost of inventory.
(iii) Profit or Loss for the month of June, 2021 -
Profit / (Loss) = Sales - Cost of Goods Sold -General Overhead Cost
=30,40,000 24,50,000 - 4,00,000 = 1,90,000.
Q.12 Following information of Sarah Ltd. is given:
Sarah Limited uses Raw Material 'A' for production of Finished Good
'B'
Closing balance of Raw Material 'A' in unitson 31st
March, 2022
750
Price Per Unit in
Cost Price
150
Freight inward
10
Replacement Cost 152
Closing balance of Finished Goods B' in units on
31st March, 2022
pe 1600
Price Per Unit in
Material Consumed
225
Direct Labour
75
Direct variable overhead
60
Total FixedOverheads amount to
1,00,000 on normal capacity of 20,000 unib
You are required to calculate the value of
Closing Stock of Finished Goods, as on 31st Closing Stock of Raw materials ana
price of Finished Goods B' is 360 per March, 2022, as per AS-2, when setuea
unit.
[CA Inter Group I, Nov. 2022]
75 ILLUSTRATIONS

Solution:
Valuation of closing stock of finished goods 'B' -
Allocationof fixed production overhead = 1,00,000 5 per unit
20,000
Calculation of Cost per unit of finished goods B-

Material Consumed
225
Direct Labour
75
Direct Variable Overhead
60
Direct Fixed Overhead
oi5
Total 365
The expected selling price ie. net realisable value (NRV) of
7360 per unit. finished goods B' is
As per AS-2, inventories should be valued at lower of cost and
Thus, finished goods B' shall be value at 360 net realisable value.
per unit being lower of its cost (ie.
365) and NRV (ie 360).
Value of closing stock of finished goods B'= 1,600 units x 360 =
5,76,000
Valuation of closing stock of raw material 'A -
Calculation of Cost per unit of raw material 'A' =150 + 10 = 160 per
unit
As per AS-2, inventories should be valued at lower of cost and net
However, materials and other supplies held for use in the production realisable value.
ries are not written down below cost if the finished products in which theyof invento
will be
incorporated are expected to be sold at cost or above cost.
However,when there has been a decline in the price of materials and it is estimated
that the cost of the finished products will exceed net realizable value, the materials
are written down to net realizable value. In such circumstances, the replacement
cost of the materials shall be the net realizable value.
In the given case, NRV of finished goods B'is?360 per unit which is less than its
cost. Thus, raw material 'A' will be valued at lower of its cost or NRV Le. its
replacement cost. Cost of raw material 'A' is? 160 per unit and its replacement cost
ise 152 per unit. So, the closing stock of raw material 'A' shall be valued at 152
per unit.
Value of closing stock of raw material 'A'=750 units x 152 =1,14.000
Thus, total value of inventory
Value of closing stock of raw material 'A' 1,14,000
Value of closing stock of finished goods 'B' 5,76,000ae
Total value of inventory 6,90,000
 VALUATION OF INVENTORIES

PROBLEMS

PI, Explain the following

() Cost of purchase (b) Cost of Conversion
() Standard Method () Retail Method
(0) SpecificCost Method () Net Realisable Value
P2. ALtd. produces chemical, Xwhich has following production cost per unit
Raw Material =5
Direct Labour =2
Direct Expenses =R 3
Normal capacity = 5,000 units per annum
Actual production = 4,000 units
Fixed Production Overhead =20,000 per annum
The company has 2,000 units of unsold stock lying with it at
are required to value the closing stock. the end of year. You
[Ans. : 28,000]
P3. The Company incurred 20,00,000 as fixed
production overhead per year. It
normally produces 1,00,000 units in a year. In 2009-10
been only 40,000 units. At the year-end 31-3-2010 however its production has
The cost of unit is below:ud the closing stock was 10,000 units.
Material
Labour
=500per uniteos Se
= 250 per unit
molil
Fixed Production overhead
= 20,00,000 p.a.
Fixed administration
= 10,00,000 p.a.
Calculat e the value of closing stock.
[Ans. :77,00,000]
P4. The Company deals in three
products X, Yand Z, which are neither
interchangeable. At the time of closing
historical cost and net realisable of its account for the year similar nor
mined as below: values of the items of closing 2001-2002. The
stock are deter
Items
Historical Cost
in lakhs) Net realisable value
X ooteoD in lakhs)
Y 20
14
Z 16
8
16
12
44
42
What will be the value of
[Ans.: 38 Lakhs] closing stock?
P5. XLtd. is selling
perthe terms of sales.refrigerator; purchase price of the
The refrigerator is to be delivered Refrigerator is
and installed at 15,000 2
customer
 PROBLEMS
77

housefree of fcost. XLtd. has hired Y& Co. forthe purpose and being paid 1,000
Refrigerator for delivery and installation. At year ended on 31-3-2010, 10
per
-refrigerator were in stock. The market price of the refrigerator is 15,750.
Calculate the value of closing stock as per AS-2.
JAns. : 1,47,500)

P6. YLtd. purchased 500 units of raw materials (@ 150 per unit gross less 10%
Trade discount sales taxis chargeable @5% on theenet price. The GST element on
product is 12 per unit against which ITC can be claimed. The company spent
/000 on transportation and 500 for loading and unloading..Calculate the cost of
material.
purchase of raw
[Ans. : 72,375)

an YZLtd. produced 10,00,000 units of product Aduring 2009-10 per unit cost
follows :
is as
Raw Material 7100
Direct wages 750
Direct Expenses 72
7152
Production overhead is 20,00,000 of which 40% is fixed. The company sold
800.000 units and 2,00,000 units were in stock as on 31st March, 2010. Normal
capacity is 5,00,000 units.
Calculate the value of closing stock.
[Ans. : 3.08 crores]
P8. Cost of Production of product Xis given below: o
Raw Material per unit 7120
Wages per unit 80
Overhead per unit 050
7250

As on the balance sheet date the replacement cost of raw material is 110 per unit.
There were 1000 units of raw material on 31-3-2011.
Calculate the value of closing stock of raw material in following conditions:
(4) If finished product is sold at the rate of 275 per unit, what will be value of
closing stock of raw material.
(b) If finished product is sold at the rate of 230 per unit, what will be value of
closing stock of raw material.
[Ans. :(a) T120,000. (b) 1,10,000]