5. 5
7/17/2012accounting standard 2
WORK IN PROGRESS
RAW MATERIALS
FINISHED GOODS
6. SCOPE
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Work in progress arising under construction
accounting standard 2
contracts
Work in progress arising in service provider
Financial
Producers of agricultural and forest products
6
7. 7/17/2012 accounting standard 2
7
Measurement of Inventory
10. An enterprise ordered 13000 Kg
of certain material at Rs.90/unit.
The purchase price includes
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excise duty Rs.5 per kg ,in respect
of which full CENVAT credit is
accounting standard 2
admissible. Freight incurred
amounted to Rs.80600. Normal
transit loss is 4%. The enterprise
actually received 12400Kg and
consumed 10000 Kg.
What is cost of inventory ? 10
11. Purchase price (13000Kg x Rs:90) 11,70,000
Less:CENVAT Credit (13,000 Kg. x Rs:5) 65,000
11,05,000
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Add: Freight
80,600
accounting standard 2
A. Total material cost 11,85,600
B. Number units normally received=96% of 13,000 Kg. Kg. 12,480
C. Normal cost per Kg. 95
11
Cost of inventory(2,400 x 95) 2,28,000
13. In the previous example suppose normal
processing loss is 5% of input.
During the accounting period , the
enterprise has actually produced 9600
units of finished product.9300 units
were sold at Rs.250 p.u. The labour and
overheads costs amounted to Rs.612845
and Rs. 223440.
Overheads are recovered on the basis
of output. Excise duty on final product
is Rs.28.50 p.u. 13
Find cost of inventory assuming normal
capacity is 9400 units.
14. Solution:-
Normal recovery rate=Rs.2,23,440/9400units=Rs.23.77
Actual Overheads p.u.=Rs.2,23,440/9600units=Rs.23.275
Recovery rate is decreased to actual Rs.23.275 p.u. due
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to high production.
accounting standard 2
Materials consumed 9,50000
Wages 6,12,845
Overheads(9600xRs.23.275) 2,23,440
Excise Duty(9600xRs.28.50) 2,73,600
Total cost 20,59,885
Normal output 9500units
Normal cost p.u 216.83
Cost of inventory 65,049 14
16. 7/17/2012 accounting standard 2
16
COST FORMULA
17. Specific Identification
Used where items of inventory are dissimilar
and not interchangeable
Feasible when inventory items are uniquely
identifiable and of sufficient value to keep
detailed records
17
7/17/2012 accounting standard 2
18. Inventory Cost Flow Assumptions
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Purchased
goods
accounting standard 2
Sold
goods
18
19. Inventory Cost Flow Assumptions
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accounting standard 2
Sold
Purchased
goods
goods
19
20. Inventory Cost Flow Assumptions
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accounting standard 2
Purchased Sold
goods goods
20
22. STANDARD COST METHOD
Uses ratios called efficiency
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Standard costs take into account normal levels of
consumption of materials and supplies, labour efficiency
and capacity utilization.
accounting standard 2
Developed above 100 years ago
Under this method, the cost of goods sold is calculated at
the standard cost and at the end.
22
23. RETAIL METHOD
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Use in retail trade/ industry
accounting standard 2
Basic
Retailing Formula
Cost of Goods + Mark up = Retail
Price
Retail Price - Cost of Goods =
Mark up
Retail Price - Mark up = Cost of
Goods 23
24. NET REALISABLE VALUE
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accounting standard 2
Net Realizable Value =
Estimated selling – Estimated cost necessary
price to make sale.
24
25. An enterprise prefers to incorporate
24
materials in finished products when :
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INCREMENTAL REVENUE >CURRENT PRICE OF
BY MAKING MATERIAL
accounting standard 2
Or When :
(Selling Price Of – Cost To Make) > Current Price Of Material
Finished Goods
Or When :
(Selling Price Of – Cost To Make) > Current Price Of Material
Finished Goods
Or When :
Selling Price Of Finished > Relevant cost of finished products
Goods
27. Case study
Raw material inventory of a company
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includes 1 Kg. of certain material purchased
at Rs:100 per Kg. The price of the material is
accounting standard 2
on decline and replacement cost of the
inventory at the year-end is Rs:80 per Kg. It is
possible to incorporate the material in a
finished product. The conversion cost is Rs:120
Inventory values for expected selling prices
of the finished product (a) Rs:195 and (b)Rs:230
are shown below
In all cases, current price of
material(Rs:80)is less than material cost 27
Rs:100
28. 7/17/2012
SELLING PRICE: RS 195 RS 230
accounting standard 2
INCREMENTAL REVENUE: RS 75 RS 110
CURRENT PRICE OF RS 80
MATERIALS: RS 50
NET REALISABLE VALUE: RS 80 RS110
COST OF MATERIAL: RS 100 RS 100
VALUE OF INVENTORY: RS 80 RS 100
28
29. 7/17/2012
Accounting policy adopted in measuring
including cost formula used,
accounting standard 2
Total carrying cost of inventories and its
classification.
29
30. BIBILOGRAPHY
7/17/2012
• STUDY MATERIAL
IPCC ACCOUNTANCY
accounting standard 2
VOL.1
30
• WWW.SIKACA.COM
