Accounting Standard 2
Accounting Standard 2
Accounting Standard 2
AS- 2
INVENTORY VALUATION
Finished Goods:
Lower of :
Cost xxx
or xxx
NRV ( Expected Selling Price Less Expected selling xxx
costs)
Work in Progress:
Lower of :
Cost xxx
or xxx
NRV ( Expected Selling Price Less Expected selling xxx
costs and expected conversion costs)
Raw Material
Valuation of Raw materials depends upon selling price and cost
price of Finished goods in which such Raw materials are
incorporated :
If selling price of the FG happens to be more than the Cost Price
of the finished goods the RM shall be valued at Raw Material Cost
Accounting Standard -2 : Valuation of Inventories
Sanjay Welkins: Page |3
- Problem - 2.1
Problem – 2.2
The company deals in three products - A,B and C which are
neither similar nor interchangeable. At the time of closing of its
account for the year 2019-20, the historical cost and NRV of the
items of closing stock are determined as follows-
Items Historical cost [lacs] NRV [lacs]
A 40 28
B 32 32
C 16 24
What will be value of closing stock?
[Ans-76 lacs]
Problem – 2.3
S-9 Limited purchased goods at the cost of Rs. 40 lakhs in
October, 2018. Till March 31st , 2019, 75 % of the stocks were
sold. The company wants to disclose closing stock at Rs. 10
lakhs. The expected sale value is Rs. 11 lakhs and a commission
at 10% on sale is payable to the agent. Advise, what is the
correct closing stock to be disclosed as at 31-3-2019
Problem - 2. 4
Solution: the company is not following AS-2. The AS-2 says that
inventories should be shown at lower or cost or net realizable
value. If there is a decline in realizable value below cost, the
inventory be shown at a lower value and the decrease in value
should be charged to the Profit & Loss A/c of the year.
Problem – 2.5
Flow do you deal with the following?
On 31.3.2018, the closing stock of Wilcox Ltd. includes 10,000 units
costing @ ` 10 i.e., Rs. 1,00,000. But the current market price as
on that date was @ ` 9 i.e., ` 90,000.
Solution:
According to AS 2, Valuation of Inventories will be lower of cost
and Net Realisable Value. In the present case the cost is Rs.
(10×10,000) i.e. `1,00,000 and the Net Realisable Value is ` 90,000.
Therefore the inventories will be valued at ` 90,000 i.e. at Net
Realisable Value.
Problem – 2.6
The total stock of 7O7 Limited as on 31.3.2019 was Rs. 5,00,000
of which stock amounting to Rs. 31,000 were not ascertained as
per AS 2.
Compute the value of the said stocks as per AS 2 for inclusion in
financial statements as on that date.
Type of Cost of Production Selling and Estimated Selling
Product Materials Expenses Distribution Price
` incurred expense to be `
` incurred
`
P 10,000 2,000 1,000 15,000
S 5,000 --- 500 4,500
T 12,000 3,000 2,000 18,000
27,000 5,000 3,500 37,500
2.7
Raw Material was purchased at Rs. 100 per Kg. Price of Raw
Material is on the decline. The Finished Goods in which Raw
Material is to be incorporated are expected to be sold below cost.
10,000 kg of Raw Material is in stock at end of the year.
Replacement cost per kg is Rs. 80.
Solution:
Valuation of Raw materials depends upon selling price and cost
price of Finished goods in which such Raw materials are
incorporated :
If selling price of the FG happens to be more than the Cost Price
of the finished goods the RM shall be valued at Raw Material Cost
If selling price of the FG happens to be Less than the Cost Price
of the finished goods the RM shall be valued at Replacement cost
of Raw Material
Since Selling price is below cost only Raw Materials shall be
valued at Replacement Cost.
Therefore closing inventory: 10,000 kg x 80 per kg = Rs. 8,00,000
2.8
On 31.03.18 there is work in progress of Product A. It is
estimated that Product can be sold at Rs. 1,000. Estimated
cost of completion is Rs. 200. Brokerage is 10% on Selling
price. Compute NRV.
Solution:
NRV
Estimated Selling Price 1,000
Less: Estimated Selling Cost : 1,000 x 10% 100
Cost of conversion 200
Net Realisable Value. 700
2.9
Calculate the value of Raw Material and Closing Stock on
the basis of following Information:
Raw Material X:
Closing Balance 500 Units
Rs. Per Unit
Cost Price
Including excise duties 200
Accounting Standard -2 : Valuation of Inventories
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Finished Goods Y
Closing Balance 1,200 units
Rs. per Unit
Material Cost 220
Direct labour 60
Direct Overheads 40
Total Fixed Overheads for the year amounted to Rs. 2,00,000 on
Normal Capacity of 20,000 units.
Calculate the value of Closing stock when:
NRV of the finished good Y is Rs. 400
NRV of the finished good Y is Rs. 300
Solution:
1. Cost of finished goods Y:
Cost Per unit
Material 220
Direct Labour 60
Direct Overheads 40
Fixed Overheads : 2,00,000 / 20,000 10
330
2.
Part A:Valuation when NRV is 400
(a) Finished goods:Y:
Cost Per unit
Cost 330
NRV 400
Closing Inventory of Finished Goods Y 1200 units
x Rs. 330 per unit
Valuation of closing inventory of finished Rs. 3,96,000
goods Y
2.10
K-985 provide following information relating to items forming part of
inventory as at 31.03.219:
Entity produces Product X and uses Raw Material F.
600 units of Raw material F purchased @ Rs. 120.
Replacement cost of Raw Material A as on 31.3.19 is Rs.
90 per unit.
500 units of partly finished goods in the process of
producing X and cost incurred till date Rs. 260 per unit.
These units can be finished next year by incurring additional
cost of Rs. 60 per unit.
1500 units of finished Product X and total cost incurred Rs.
320 per unit.
Expected Selling Price of Product X is 300 per unit.
Determine how each item of inventory will be valued as at
31.03.19.
Solution:
Also calculate the value of total inventory as on 31.3.2019.
If finished product is expected to be sold below cost of finished
goods then Raw material should be valued at Replacement cost.
thus Raw material inventory shall be valued :. 600 units x Rs. 90
= Rs. 54,000
Valuation of WIP:
500 units of partly finished goods shall be valued at lower of Cost
and NRV.
Cost = Rs. 260 + 60 (additional cost) = 320
NRV that is Selling Price = 300 - 60 = 240
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Problem – 3.1
Hayman limited has a normal capacity of 6,000 tonnes and fixed
annual overheads are Rs.24,000. During the year, it manufactured
only 5,500 tonnes at variable cost comprising of material and labour
@ Rs.6 and 4 per tonne. At the end of the year, it had 1800
tonnes of inventory. Find out the value of inventory as per AS-2.
[Ans. Rs.1,800 x 14]
Solution:
Cost of production (per tonne):
Variable cost (Rs.6 + Rs.4) Rs.10
Fixed Cost (Rs.24,000 /6,000) Rs. 4
Rs.14
Inventory at the end (tonnes) 1,800
Value of inventory (1,800 * Rs.14) Rs.25,200
It may be noted that the fixed expenses have been allocated on
the basis of standard cost system.
Problem – 4.1
Sony Pharmacy ordered 12000 kg of certain material at Rs. 80 per
unit. The purchase price includes excise duty Rs. 4 per kg in
respect of which full CENVAT credit is admissible. Freight incurred
amounted to Rs. 77,400. Normal transit loss is 3%. The company
actually received 11,600 kg and consumed 10,100 kg of material.
Compute cost of inventory under required Standard and amount of
abnormal loss.
Solution:.
Purchase Price 12,000 kg x 80 9,60,000
Less: CENVAT credit 12,000 kg x 4 48,000
Add: Freight 77,400
A. Total Material Cost 9,89,400
B. Total units ordered 12,000 kg
C. Normal Loss 3% 360
D Number of units after Normal loss 11,640
E. Normal cost per unit : A / D 85.00
Valuation :
Material consumed 10,100 x 85.00 8,58,500
Cost of Inventory that is 1,500 x 85.00 1,27,500
Remaining materials
Abnormal loss 40 x 85.00 3,400
Total Material cost 9,89,400
Problem – 4 .2
Z-888 ordered 13000 kg of certain chemicals at Rs. 90 per unit.
The purchase price includes excise duty Rs. 5 per kg in respect of
which full CENVAT credit is admissible. Further State VAT is
leviable at Rs. 2.5 per kg on Purchase price.
Freight incurred amounted to Rs. 30,000. Normal transit loss is 4%.
The company actually received 12,400 kg and consumed 10,000 kg
of material.
Company has received trade discount in form of cash amounting to
Rs. 1 per kg.
The chemicals were delivered in containers.
the containers were not re-useable, hence sold for Rs. 500.
the administrative expenses incurred to bring chemicals were Rs.
10,000.
Accounting Standard -2 : Valuation of Inventories
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Problem – 4 . 3
Solution:
The company is not following a correct method of calculation of
cost. As per AS-2, the following are not to be included in valuation
of inventories:
Abnormal wastages,
Storage cost,
Administrative overheads, and
Selling & distribution costs.
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Problem – 4 . 4
From the following information ascertain the value of stock as on
31.03.2019
Opening stock as on 01.04.2018 28,500
Purchases 1,52,500
Manufacturing expenses 30,000
Selling expenses 12,100
Administrative expenses 6,000
Financial Expenses 4,300
Sales 2,49,000
Problem – 4 . 4
Capital Cables limited has a normal wastage of 4% in the
production process. During the year 2019-20 the company used
12,000 Metric tonnes (MT) of raw material costing Rs. 150 per MT.
At the end of the year 630 MT of wastage was in stock.
the accountant wants to know how this wastage is to be treated in
the books.
Explain in the context of AS 2 the treatment of normal loss and
abnormal loss and also find out the amount of abnormal loss if
any.
According to AS - 2, abnormal amounts of wasted materials, labour
and other production costs are excluded from cost of inventories
and such costs are recognised as expenses in the period in which
they are incurred.
the amount of normal loss will be included in computing the cost of
inventories (finished goods) at the year end.
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Solution:
Lumber
Firewood
Sawdust
Use the following data relating to two Products A and B obtained from a
joint process and allocate joint costs using each of the above methods.
Chemical A B
Quantity (kg) 100 150
Sale Value Rs.30,000 Rs.70,000
Further Processing Cost Rs.5,000 Rs.10,000
Total manufacturing cost of joint process was Rs.50,000.
Solution
Since cost of Product A has been estimated we can find out the
cost Product B just by subtracting the above costs from the total
under each method respectively as shown below:
Cost to be allocated to Product B:
Physical Measurement Method 50,000 − 16,000 34,000
Relative Sales Value Method 50,000 − 15,000 35,000
NRV Method 50,000 − 20,833 29,167
Problem – 6.1
Solution -
Often goods have to be manufactured according to customer's
wishes and desires and accordingly raw materials have to be
procured as per the specifications laid down the concerned party.
Quite obviously inventories under such circumstances are valued as
per specific cost identification.
Problem- 7.1
H-786 is a leading distributor of petrol. A detailed inventory of petrol
in hand is taken when the books are closed at the end of each
month. At the end of the month following information is available:
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Profit or Loss:
Sales Rs. 47,25,000
Cost of goods sold Rs. (39,22,500)
General overheads Rs. (1,25,000)
Profit Rs. 6,77,500
Problem- 7.2
Solution -
The company is following the policy of valuation inventory as per
AS-2 i.e., lower of cost or net realizable value. But, the calculation
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of cost and net realizable value is not being made as per AS-2
which requires that cost of inventory be found as per FIFO method
and net realizable value of inventory means the estimated selling
price less the expenses necessary to make such sale.
Problem – 7.2
Wyes Ltd. values its finished goods at prime cost (FIFO) or net
realizable value, whichever is less. Comment.
Solution -
FIFO based prime cost is not advised by the AS-2 which says that
cost of finished goods should include cost of raw material, packing
material and a portion of fixed and valuable overheads.
Problem – 8.1
How will you deal with the following situation?
“A company deals in purchase and sale of timber and has included
notional interest charges calculated (on the paid-up share capital and
free reserves) in the value of stock of timber as at the Balance
Sheet date as part of cost of holding the timber”.
Solution:
According to Valuation of Inventories, interest and other borrowing
costs are usually considered as not relating to bringing the
inventories to their present location and are, therefore, usually not
included in the cost of inventories. Hence, the valuation of closing
stock of timber cannot be considered as it is not in conformity with
AS 2.
Problem – 8.2
How would you deal with the following in the annual accounts of a
company for the year ended 31.3.2013?
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“The company has to pay delayed cotton clearing charges over and
above the negotiated price for asking delayed delivery of cotton from
the supplier’s godown. Up to 2011-12, the company has regularly
included such charges in the valuation of closing stock. This being
in the nature of interest the company has decided to exclude it
from closing stock valuation for the year 2012-13. This would result
into decrease in profit by Rs. 7.60 lakhs.”
Solution:
As per Para 12, AS 2, Valuation of Inventories, interest and other
borrowing costs are usually considered as not relating to bringing
the inventories to their present location and condition and are,
therefore, usually not included in the cost of inventories. Thus, it
becomes quite clear that delayed cotton clearing charges which were
treated in the nature of interest must not be included while valuing
closing stock as per the provision of AS 2 and it is not in
compliance with AS 2 which was done up to 2010-11.
But from year 2011-12, the company decided to change the earlier
view i.e. they decided to exclude the same from the valuation of
closing stock which is, no doubt, in compliance with AS 2.
As a result of change in accounting policy regarding valuation of
stock the profit was reduced by is. 7.60 lakhs which must be
disclosed in the financial statement or per AS 1 as Notes to
Account.
Problem – 9 .1 –
Disclosure
The financial statements should disclose: