AS 2 i.e. Accounting Standard 2: Valuation of Inventories is one of the accounting standards repeatedly asked in many exams. QLI is one of the best IPCC Classes in Mumbai (www.qli.co.in)

1. Valuation of inventories
AS---2
1AS 2 Valuation of inventories

2. objective
Computation of cost of
inventories/stock
Determine the value of closing
stock
to be shown in B/s
Till not sold Recognized as revenue
2AS 2 Valuation of inventories

3. Inventories consist of the following :
Held for sale in ordinary course of
business ( FINISHED GOODS)
In the process of production of such sale (raw
material and WIP)
In the form of materials or supplies to be consumed in
production process or in rendering services
(stores,spares, raw material, consumables)
Spares which can be used only in connection with an item of
fixed assets and whose use is irregular , such machinery
spares are accounted for in accordance with AS 10’
accounting for FA ‘
3AS 2 Valuation of inventories

4. Accounting for machinery spares
4AS 2 Valuation of inventories

5. • Machinery spares , which are not specific to a particular item of FA but
can be used generally for various items of FA
SHOULD be treated as inventories for the purpose of AS-2
charged to the statement of Profit & loss acccount
5AS 2 Valuation of inventories

6. • Whether to capitalise machinery spare under AS—10 or not will depend
on the facts and circumstances of each case.
• However, the machinery spare of the following types should be
capitalized being the nature of capital spares/ insurance spares:
1) Machinery spares which are SPECIFIC to a particular item of fixed
assets ie it can be used only in connection with a particular item of FA
2) Their use is expected to be IRREGULAR.
 e.g in office , there are other assets , spares parts used in such assets are
irregular in use.
6AS 2 Valuation of inventories

7. • When the related fixed asset is discarded or sold
WDV
- disposal value
of the spares should be
written off
7AS 2 Valuation of inventories

8. MEASUREMENT OF INVENTORIES
• Inventories should be valued at lower of cost and NRV.
• Major points for valuation of inventories:
Determination
of cost of
inventories
Determination
of NRV
Comparing
cost & NRV
8AS 2 Valuation of inventories

9. What is cost of inventories?
Cost of purchase
Purchase price
+ Duties & Taxes
+ Freight inward
+ Other cost directly associated
TOTAL (A)
Recoveries
Duties & Taxes recoverable
+ Trade discounts
+ Rebate
+ Duty drawback
TOTAL (B)
Cost of inventory [ A – B]
9AS 2 Valuation of inventories

10. Exclusions from cost of Inventories
X Abnormal amounts of wasted :
 material
 labour
 other production cost
X Storage cost
X Administrative overhead
X Selling & distribution cost
X Interest & borrowing cost [ however, As – 16 allows such cost to be
included.
10AS 2 Valuation of inventories

11. Cost formula
Cost formula
Specific identification
method
Where specific
identification method
is NOT applicable
Cost of inventories in
certain conditons
3
11AS 2 Valuation of inventories

12. Specific identification method for
determining cost of inventory
directly linking the cost with specific items
 In case of purchase of item specifically segregated for specific project & is
not ordinarily interchangeable.
purchase of item for specific project
X which is not ordinarily
inter changeable
 In case of goods or services produced & segregated for specific project.
goods segregated for
services specific project
produced
12AS 2 Valuation of inventories

13. Where specific identification method
is NOT applicable
The cost of inventories is valued by the
following methods:
 FIFO
 Weighted average cost
13AS 2 Valuation of inventories

14. Cost of inventories in certain
conditions
• When it is impractical to calculate the cost
Following
methods
Retail
Method
Standard Cost
14AS 2 Valuation of inventories

15. Standard Cost
• It takes into account
Normal level
 of consumption of material and supplies
 labour
 efficiency
 capacity utilization
15AS 2 Valuation of inventories

16. Retail Method
• It is used in retail business:
• when it is difficult to ascertain cost of individual item.
• When item of inventories are rapidly changing items, having similar margins
& no other method of cost can be used.
 cost of inventory is determined by reducing from the sales value
inventories the approximate % of gross margin.
Sales value
- % gross margin [ takes into consideration the inventory that has been
marked down to below its original selling price]
16AS 2 Valuation of inventories

17. Net realisable value
• It is the estimated selling price in ordinary course of business, less estimated cost
of completion and estimated cost necessary to make the sale.
selling price
- less: estimated cost of completion
- less:estimated cost necessary to make the sale
 Such estimations are made on each balance sheet date.
 Estimation of NRV also takes into account the purpose for which the inventory is
held.
17AS 2 Valuation of inventories

18. Estimation of NRV
18AS 2 Valuation of inventories

19. • The NRV of the material & other supplies held for use in production of
finished goods is estimated as under:
• If the finished product in which raw material & supplies used is sold at cost
or above cost.
• then the estimated realisable value of raw material & supplies is considered
more than its cost.
• Therefore inventories of raw material will be valued at cost.
Shirt is the finished
product
It is sold at cost or
 above cost
Then estimated RV of the raw material
and supplies will be considered more
than cost .
 Therefore inventories of raw material
will be valued at cost 19AS 2 Valuation of inventories

20. • If the finished product in which raw material & supplies used is sold at cost
or above cost.
• then the estimated realisable value of raw material & supplies is considered
more than its cost.
• Therefore inventories of raw material will be valued at cost.
Shirt is the finished
product
It is sold below
cost
Then estimated RV of the raw material /
supplies is equal to replacement price of
raw material or supplies
 Therefore inventories of raw material
will be valued at Replaced price. 20AS 2 Valuation of inventories

21. 1. Raw material was purchased at Rs. 100 per kg. price of raw material is on the
decline. The finished goods in which the raw material is incorporated are
expected to be sold at below cost. 10,000 kgs of raw material is in stock at
the year end. Replacement cost is Rs. 80 per kg. How will you value the
inventory?
 In this case, the stock of 10000 kgs of raw material will be valued at Rs. 80 per
kg.
 The finished goods, if on stock , should be valued at cost or NRV whichever is
less.
21AS 2 Valuation of inventories

22. 2.
Cost of production of product D is given below:
Raw material per unit Rs 120
Wages per unit Rs 80
Overhead per unit Rs 50
Total RS 250
As on the balance sheet date the replacement cost of raw material is Rs 110 per
unit. There were 1000 units of raw material on 31- 3- 14.
Calculate the value of closing stock of raw material in the following conditions:
a) If the finished product is sold at the rate of Rs. 275 per unit,what will be the
value of closing stock of raw material.
 The value of closing stock would at cost i.e RS 120 per unit.
 Total value would be 1000 x Rs 120 = Rs 120000.
22AS 2 Valuation of inventories

23. • If the finished product is sold at the rate of Rs.230 per unit, what will be value of closing
stock of raw material?
 The closing stock would be valued at replaced value Rs. 110 per unit.
 the total value would be Rs 110,00
3. The company sells IMFL & beer to the customers, some of the customers consumed the
beer in the bars run by it .while leaving the bar, the consumers left the empty bottles in
the bars and the company take the possession of these empty bottles. The empty
bottles are disposed off by the company. The company has laid down detailed
procedures for the maintenance of the records, tenders to be called for the disposal of
the empty bottles-
a) Whether the stock of empty bottles is an asset of the company.
b) If so, whether the stock of empty bottles existing as on the date of the balance sheet is
to be considered as inventories of the company.
 The stock of empty bottles is an asset of the company being a resource controlled by
the company as a result of past events from which future economic benefits are
expected to flow to it.
 The stock of empty bottles existing at the balance sheet date is the inventory of the
company.
 It will be valued at the lower of cost and NRV, also the same is not considered as income
hence the cost of bottles is NIL, the total stock should be reflected at the nominal value
of Re 1 in the balance sheet.
23AS 2 Valuation of inventories