CHAPTER

3 IND AS 2 – INVENTORIES

CONCEPTS COVERED

1. INTRODUCTION
2. SCOPE
3. DEFINITIONS
4. MEASUREMENT OF INVENTORIES
5. RECOGNITION AS AN EXPENSE
6. DICLOSURE
7. SELF PRACTICE QUSTIONS

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IND AS 2 – Inventories
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1. INTRODUCTION :
The objective of this Standard is to prescribe the accounting treatment for inventories. This
Standard provides the guidance for determining the cost of inventories and for subsequent
recognition as an expense, including any write-down to net realisable value.

2. SCOPE :
• This Standard is applicable to all inventories, except:
a) financial instruments (to be accounted under Ind AS 32, Financial Instruments:
Presentation and Ind AS 109, Financial Instruments);
b) biological assets (i.e. living animals or plants) related to agricultural activity and
agricultural produce at the point of harvest (to be accounted under Ind AS 41,
Agriculture);
• This Standard does not apply to the measurement of inventories held by:
a) producers of agricultural and forest products, agricultural produce after harvest,
and minerals and mineral products, to the extent that they are measured at net
realisable value in accordance with well-established practices in those industries.
When such inventories are measured at net realisable value, changes in that value
are recognised in profit or loss in the period of the change
b) Commodity broker-traders who measure their inventories at fair value less costs to
sell.
When such inventories are measured at net realisable value/ fair value less costs to
sell, changes in those values are to be recognised in profit or loss in the period of
the change.

3. DEFINITIONS :
1. Inventories :
Inventories are Assets
a) held for sale in the ordinary course of business; (Finished Goods)
b) in the process of production for such sale; or (Work in progress)
c) in the form of materials or supplies to be consumed in the production process or in
the rendering of services. (Raw material)

in the process of
production for such sale
in the form of materials or
held for sale in the ordinary supplies to be consumed in the
course of business production process or in the
rendering of services.

Inventories
are Assets

IND AS 2 – Inventories
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2. Inventories encompass of :
a) goods purchased and held for resale (e.g. merchandise purchased by a retailer and
held for resale, or land and other property held for resale);
b) finished goods produced, or work in progress being produced, by the entity; and
includes
c) Materials and supplies awaiting use in the production process.

Costs incurred to fulfill a contract with a customer that do not give rise to inventories are
accounted as per Ind AS 115.

Question 1 –
As per Ind AS 2, inventories include ‘materials and supplies awaiting use in the
production process’. Whether packing material and publicity material are covered by
the term ‘materials and supplies awaiting use in the production process’.

3. Net realisable value :

Net realisable 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.
Net realisable value refers to the net amount that an entity expects to realize from the sale
of inventory in the ordinary course of business. Fair value reflects the price at which an
orderly transaction to sell the same inventory in the principal (or most advantageous)
market for that inventory would take place between market participants at the
measurement date. The former is an entity-specific value; the latter is not. Net realisable
value for inventories may not equal fair value less costs to sell.

4. Fair Value :
Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. (Ind AS
113, Fair Value Measurement.)

Difference between Net Realisable Value (NRV) and Fair Value (FV)
Basis NRV FV
Meaning NRV refers to the net amount that an FV reflects the price at which an
entity expects to realise from the orderly transaction to sell the same
sale of inventory in the ordinary inventory in the principal (or most
course of business. advantageous) market for that
inventory would take place between
market participants at the
measurement date
Measurement Entity-specific value i.e. the amount Market based measurement
base that the entity actually expects to
make from selling the particular
inventory

IND AS 2 – Inventories
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4. MEASUREMENT OF INVENTORIES :

• Cost of Inventories
• Cost of Purchase
• Cost of Conversion
Measurement of • Other costs
Inventories • Allocation of cost to joint
products and by-products
• Cost Formulas
• Net realisable value

“Inventories shall be measured at the lower of cost and net realisable value.”
Net Realisable
At lower of COST
Value

1) Cost of Inventories :

Cost of Purchase

Conversion Cost
COST

Other costs incurred in bringing the inventories to

their present location and condition

2) Cost of Purchase :

Purchase Price

Import Duties and Other Taxes

Cost of Purchase

Transport, handling and

other costs directly attributable to the acquisition of finished goods,

materials and services.

Trade discounts, rebates and other similar items

IND AS 2 – Inventories
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 Question 2 – ABC Ltd
ABC Ltd. buys goods from an overseas supplier. It has recently taken delivery of 1,000
units of component X. The quoted price of component X was Rs. 1,200 per unit but
ABC Ltd. has negotiated a trade discount of 5% due to the size of the order.
The supplier offers an early settlement discount of 2% for payment within 30 days and
ABC Ltd. intends to achieve this.
Import duties (basic custom duties) of Rs. 60 per unit must be paid before the goods
are released through custom. Once the goods are released through customs, ABC Ltd.
must pay a delivery cost of Rs. 5,000 to have the components taken to its warehouse.
Calculate the cost of inventory.

3) Cost of Conversion :

Cost of
Conversion

Overheads (fixed
Direct other direct
Direct Labour and Variable
Material Cost
Overheads)

• Fixed production overheads are those indirect costs of production that remain
relatively constant regardless of the volume of production, such as depreciation and
maintenance of factory buildings and equipment, and the cost of factory
management and administration.
• Allocation of fixed production overheads to the costs of conversion is based on the
normal capacity of the production facilities. Normal capacity is the production
expected to be achieved on average over a number of periods or seasons under
normal circumstances, taking into account the loss of capacity resulting from
planned maintenance. The actual level of production may be used if it approximates
normal capacity.
• When production levels are abnormally low, unallocated overheads are recognised
as an expense in the period in which they are incurred. In periods of abnormally
high production, the amount of fixed overhead allocated to each unit of production
is decreased so that inventories are not measured above cost.
• Variable production overheads are those indirect costs of production that vary
directly, or nearly directly, with the volume of production, such as indirect materials
and indirect labour. Variable production overheads are allocated to each unit of
production on the basis of the actual use of the production facilities.

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 Question 3 – Pluto Ltd
Pluto Ltd. has a plant with the normal capacity to produce 5,00,000 unit of a product
per annum and the expected fixed overhead is Rs.15,00,000. Fixed overhead on the
basis of normal capacity is Rs.3 per unit (15,00,000/5,00,000). How shall u treat Fixed
overheads under following circumstances
a. Actual production is 5,00,000 units
b. Actual production is 3,75,000 units
c. Actual production is 7,50,000 units.

Question 4 – A business
A business plans for production overheads of Rs. 10,00,000 per annum.
The normal level of production is 1,00,000 units per annum.
Due to supply difficulties the business was only able to make 75,000 units in the current
year. Other costs per unit were Rs. 126.
Calculate the per unit cost and amount of overhead to be expensed during the year.

Question 5 – ABC Ltd

ABC Ltd. manufactures control units for air conditioning systems.
Each control unit requires the following:
1 component X at a cost of Rs. 1,205 each
1 component Y at a cost of Rs. 800 each
Sundry raw materials at a cost of Rs. 150 each
The company faces the following monthly expenses:
Factory rent Rs. 16,500
Energy cost Rs. 7,500
Selling and administrative costs Rs. 10,000
Each unit takes two hours to assemble. Production workers are paid Rs. 300 per hour.
Production overheads are absorbed into units of production using an hourly rate. The
normal level of production per month is 1,000 hours.
Determine the cost of inventory.

4) Other costs :
• Other costs are included in the cost of inventories only to the extent that they are
incurred in bringing the inventories to their present location and condition. Cost to
be excluded from the cost of inventories and recognised as expenses in the period
in which they are incurred are:
a) abnormal amounts of wasted materials, labour or other production costs;
b) storage costs, unless those costs are necessary in the production process
before a further production stage;
c) administrative overheads that do not contribute to bringing inventories to
their present location and condition; and
d) selling costs.

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 • The extent to which borrowing cost is included in the cost of inventories is
determined on the basis of the requirement of Ind AS 23 Borrowing Costs.
• An entity may acquire inventories on deferred settlement terms. When the
arrangement effectively contains a financing element, that element, for example a
difference between the purchase prices for normal credit terms and the amount
paid, is recognised as interest expense over the period of the financing.

Question 6 – A dealer
A dealer has purchased 1,000 cars costing Rs. 2,80,000 each on deferred payment basis
as Rs. 25,000 per month per car to be paid in 12 equal instalments.
At year end 31 March 20X1, twenty cars are in stock. What would be the cost of goods
sold, finance cost and inventory carrying amount?

Summary :

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 Question 7 – Venus Trading Company
Venus Trading Company purchases cars from several countries and sells them to Asian
countries. During the current year, this company has incurred following expenses:
1. Trade discounts on purchase
2. Handling costs relating to imports
3. Salaries of accounting department
4. Sales commission paid to sales agents
5. After sales warranty costs
6. Import duties
7. Costs of purchases (based on supplier’s invoices)
8. Freight expense
9. Insurance of purchases
10. Brokerage commission paid to indenting agents
Evaluate which costs are allowed by Ind AS 2 for inclusion in the cost of inventory in
the books of Venus.

Question 8 – As per IND AS 2

As per Ind AS 2, selling costs are excluded from the cost of inventories and are required
to be recognised as an expense in the period in which these are incurred. Whether the
distribution costs would now be included in the cost of inventories under Ind AS 2.

5) Allocation of cost to joint products and by-products :

• A production process may result in more than one product being produced
simultaneously. This is the case, for example, when joint products are produced or
when there is a main product and a by-product.
• When the costs of conversion of each product are not separately identifiable, they
are allocated between the products on a rational and consistent basis. The
allocation may be based, for example, on the relative sales value of each product
either at the stage in the production process when the products become separately
identifiable, or at the completion of production.
• Most by-products, by their nature, are immaterial. When this is the case, they are
often measured at net realisable value and this value is deducted from the cost of
the main product. As a result, the carrying amount of the main product is not
materially different from its cost. cost of the main product. As a result, the carrying
amount of the main product is not materially different from its cost.

IND AS 2 – Inventories
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 When the cost of Cost of each product
conversion is is based on the
separately identifiable separate cost incurred

The outcome is Joint Allocation of cost is

products based on relative sales
value of each product
either at the stage in
When the cost of the production
When more than one product is

conversion is not process when the

produced in the process

separately identifiable products become

separately
identifiable, or at the
completion of
production.

By-product is
measured at NRV and
When the by-product
this value is deducted
is immaterial
from the cost of the
The outcome is Main main product
product with a By-
product
By-product is treated
When the by-product as joint product and
is material accordingly the
accounting is done

Question 9 – In a manufacturing
In a manufacturing process of Mars ltd, one by-product BP emerges besides two main
products MP1 and MP2 apart from scrap. Details of cost of production process are here
under:
Item Unit Amount Output Closing Stock
31/3/2011
Raw Material 14500 150000 MP I-5,000 units 250
Wages - 90000 MP II-4,000 units 100
Fixed Overhead - 65000 BP- 2,000 units
Variable Overhead - 50000
Average market price of MP1 and MP2 is Rs 60 per unit and Rs 50 per unit respectively,
by- product is sold @ Rs 20 per unit. There is a profit of Rs 5,000 on sale of by-product
after incurring separate processing charges of Rs. 8,000 and packing charges of Rs
2,000, Rs 5,000 was realised from sale of scrap.
Required: Calculate the value of closing stock of MP1 and MP2 as on 31-03-2011.

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6) Cost Formulas :

Question 10 – Mars Fashions

Mars Fashions is a new luxury retail company located in Lajpat Nagar, New Delhi. Kindly
advise the accountant of the company on the necessary accounting treatment for the
following items:
(a) One of Company’s product lines is beauty products, particularly cosmetics such
as lipsticks, moisturizers and compact make-up kits. The company sells
hundreds of different brands of these products. Each product is quite similar,
is purchased at similar prices and has a short lifecycle before a new similar
product is introduced. The point of sale and inventory system is not yet fully
functioning in this department. The sales manager of the cosmetic department
is unsure of the cost of each product but is confident of the selling price and has
reliably informed you that the Company, on average, make a gross margin of
65% on each line.
(b) Mars Fashions also sells handbags. The Company manufactures their own
handbags as they wish to be assured of the quality and craftsmanship which
goes into each handbag. The handbags are manufactured in India in the head
office factory which has made handbags for the last fifty years. Normally, Mars
manufactures 100,000 handbags a year in their handbag division which uses

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 15% of the space and overheads of the head office factory. The division
employs ten people and is seen as being an efficient division within the overall
company.
In accordance with Ind AS 2, explain how the items referred to in a) and b)
should be measured.

Question 11 – FIFO and Weighted Average Method

Particulars Units Units sold Actual Actual Total
available Cost/unit Cost
(Rs.) (Rs.)
Opening inventory 100 - 2.1 210
Sale - 75 - -
Purchases 150 - 2.8 420
Sale - 100 - -
Purchase 50 - 3 150
Total 300 175 - 780

Solution:
FIFO Method:
Cost of Goods Sold: 100 units x Rs. 2.10 + 75 units x Rs. 2.80 = Rs. 420
Closing Inventory: 50 units x Rs. 3.00 + 75 units x Rs. 2.80 = Rs. 360
Weighted Average Method:
Weighted average cost / unit: 780 units / Rs. 300 = Rs. 2.60
Cost of Goods Sold: 175 units x Rs. 2.60 = Rs. 455
Closing Inventory: 125 units x Rs. 2.60 = Rs. 325
Note: Weighted average method in practice is a moving average so computed after
each purchase made and so sales are costed at most recent averages.
Cost of Goods Sold:
75 units @ Rs. 2.10 and 100 units @ Rs. 2.70 i.e. total cost = Rs. 427.50
Closing Inventory: 125 units x Rs. 2.82 = Rs. 352.50

Question 12 –
Whether an entity can use different cost formulae for inventories held at different
geographical locations having similar nature and use to it.

Question 13 – Mercury Ltd.

Mercury Ltd. uses a periodic inventory system. The following information relates to
2011 -2012
Date Particulars Unit Cost P.U Total Cost
April Inventory 200 10 2000

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 May Purchase 50 11 550
Sept Purchase 400 12 4800
Feb Purchase 350 14 4900
Total 1000 12250
Physical inventory at 31.03.2012 400 units. Calculate ending inventory value and cost
of sales using: (a) FIFO (b) Weighted Average.

7) Net realisable value :

• Measurement of net realisable value :
o Net realisable 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. The cost of inventories may not be recoverable
if those inventories are damaged, if they have become wholly or partially
obsolete, or if their selling prices have declined.
o Estimates of net realisable value are based on the most reliable evidence
available at the time the estimates are made, of the amount the inventories
are expected to realise. These estimates take into consideration fluctuations
of price or cost directly relating to events occurring after the end of the
period to the extent that such events confirm conditions existing at the end
of the period.
o Estimates of net realisable value also take into consideration the purpose for
which the inventory is held. For example, the net realisable value of the
quantity of inventory held to satisfy firm sales or service contracts is based
on the contract price. If the sales contracts are for less than the inventory
quantities held, the net realisable value of the excess is based on general
selling prices.
o Inventories are usually written down to net realisable value item by item. It
is not appropriate to write inventories down on the basis of a classification
of inventory, for example, finished goods, or all the inventories in a particular
operating segment.

• Writing inventories down to net realisable value :

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 or above cost. However, when a decline in the price of
materials indicates that the cost of the finished products exceeds net realisable
value, the materials are written down to net realisable value. In such circumstances,
the replacement cost of the materials may be the best available measure of their
net realisable value.

• Reversals of write-downs :
o A new assessment is made of net realisable value in each subsequent period.
When the circumstances that previously caused inventories to be written
down below cost no longer exist or when there is clear evidence of an
increase in net realisable value because of changed economic circumstances,
the amount of the write-down is reversed (ie the reversal is limited to the
amount of the original write-down) so that the new carrying amount is the
lower of the cost and the revised net realisable value.

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 o This occurs, for example, when an item of inventory that is carried at net real
isable value, because its selling price has declined, is still on hand in a
subsequent period and its selling price has increased.

Question 14 –
Whether the following costs should be considered while determining the Net
Realisable Value (NRV) of the inventories?
(a) Costs of completion of work-in-progress;
(b) Trade discounts expected to be allowed on sale; and
(c) Cash discounts expected to be allowed for prompt payment

Question 15 – ABC Ltd.

ABC Ltd. manufactures and sells paper envelopes. The stock of envelopes was included
in the closing inventory as of 31st March, 20X1, at a cost of Rs. 50 per pack. During the
final audit, the auditors noted that the subsequent sale price for the inventory at 15th
April, 20X1, was Rs. 40 per pack. Furthermore, enquiry reveals that during the physical
stock take, a water leakage has created damages to the paper and the glue.
Accordingly, in the following week, ABC Ltd. has spent a total of Rs. 15 per pack for
repairing and reapplying glue to the envelopes.
Calculate the net realizable value and inventory write-down (loss) amount.

Question 16 – Company P
At the end of its financial year, Company P has 100 units of inventory on hand recorded
at a carrying amount of Rs. 10 per unit. The current market price is Rs. 8 per unit at
which these units can be sold. Company P has a firm sales contract with Company Q to
sell 60 units at Rs. 11 per unit, which cannot be settled net. Estimated incremental
selling cost is Rs. 1 per unit.
Determine Net Realisable Value (NRV) of the inventory of Company P.

Question 17 – A business
A business has four items of inventory. A count of the inventory has established that
the amounts of inventory currently held, at cost, are as follows:
Rs.
Cost Estimated Sales price Selling costs
Inventory item A1 8,000 7,800 500
Inventory item A2 14,000 18,000 200
Inventory item B1 16,000 17,000 200
Inventory item C1 6,000 7,500 150
Determine the value of closing inventory in the financial statements of a business.

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 Net realisable value for raw material

Material and other

supplies held for use in
the product of inventory

When finished goods When finished goods

are sold at or above cost are sold at NRV

Raw material is
Raw material is measured at
measured at cost replacement cost
measured as NRV

Question 18 –
Particulars Kg. Rs.
Opening Inventory: Finished Goods 1,000 25,000
Raw Materials 1,100 11,000
Purchases 10,000 1,00,000
Labour 76,500
Overheads (Fixed) 75,000
Sales 10,000 2,80,000
Closing Inventory: Raw Materials 900
Finished Goods 1200
The expected production for the year was 15,000 kg of the finished product. Due to
fall in market demand the sales price for the finished goods was Rs. 20 per kg and the
replacement cost for the raw material was Rs. 9.50 per kg on the closing day. You are
required to calculate the closing inventory as on that date.

Question 19 – Sun Pharma Limited

Sun Pharma Limited, a renowned company in the field of pharmaceuticals has the
following four items in inventory: The Cost and Net realizable value is given as follows:
Item Cost Net Realisable Value
A 2,000 1,900
B 5,000 5,100
C 4,400 4,550
D 3,200 2,990

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 Total 14,600 14,540
Determine the value of Inventories:
a. On an item by item basis
b. On a group basis

5. RECOGNITION AS AN EXPENSE :
1) The amount of inventories recognised as an expense in the period will generally be:
a) carrying amount of the inventories sold in the period in which related revenue is
recognised; and
b) the amount of any write-down of inventories to net realisable value and all losses
of inventories shall be recognised as an expense in the period the write-down or
loss occurs; reduced by the amount of any reversal in the period of any write-down
of inventories, arising from an increase in net realisable value shall be recognized
as a reduction in the amount of inventories recognised as an expense in the period
in which the reversal occurs.
2) Some inventories may be allocated to other asset accounts, for example, inventory used
as a component of self-constructed property, plant or equipment. Inventories allocated to
another asset in this way are recognised as an expense during the useful life of that asset
through charging of depreciation on that asset.

Example:
An item of inventory costing Rs.20,000 as covered under Ind AS 2 is consumed in the construction
of self-constructed property to be accounted as Property, plant and equipment under Ind AS 16.
The cost of such property, plant and equipment other than inventories is Rs.80,000. Such
Inventory needs to be capitalized in the cost of Property, plant and equipment. The useful life of
the property is 5 years. The depreciation on such property charged to profit and loss account is
Rs.20,000 per annum (i.e. 1,00,000/ 5)

6. DISCLOSURE :
The financial statements shall disclose:

Accounting policies

Inventories pledged Analysis of carrying

as security amount

Amounts Inventories carried

recognised in profit at fair value less
or loss costs to sell

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7. SELF PRACTICE QUESTIONS :

Question 20 – UA Ltd.
UA Ltd. purchased raw material @ Rs. 400 per kg. Company does not sell raw material
but uses in production of finished goods. The finished goods in which raw material is
used are expected to be sold at below cost. At the end of the accounting year, company
is having 10,000 kg of raw material in inventory. As the company never sells the raw
material, it does not know the selling price of raw material and hence cannot calculate
the realizable value of the raw material for valuation of inventories at the end of the
year. However, replacement cost of raw material is Rs. 300 per kg. How will you value
the inventory of raw material?

Question 21 – Sun Ltd.

Sun Ltd. has fabricated special equipment (solar power panel) during 20X1-20X2 as per
drawing and design supplied by the customer. However, due to a liquidity crunch, the
customer has requested the company for postponement in delivery schedule and
requested the company to withhold the delivery of finished goods products and
discontinue the production of balance items.
As a result of the above, the details of customer balance and the goods held by the
company as work-in-progress and finished goods as on 31.3.20X3 are as follows:
Solar power panel (WIP) Rs. 85 lakhs
Solar power panel (finished products) Rs. 55 lakhs
Sundry Debtor (solar power panel) Rs. 65 lakhs
The petition for winding up against the customer has been filed during 20X2-20X3 by
Sun Ltd. Comment with explanation on provision to be made of Rs. 205 lakh included
in Sundry Debtors, Finished goods and work-in-progress in the financial statement of
20X2-20X3.

Question 22 – ABC
On 31 March 20X1, the inventory of ABC includes spare parts which it had been
supplying to a number of different customers for some years. The cost of the spare
parts was Rs. 10 million and based on retail prices at 31 March 20X1, the expected
selling price of the spare parts is Rs. 12 million. On 15 April 20X1, due to market
fluctuations, expected selling price of the spare parts in stock reduced to Rs. 8 million.
The estimated selling expense required to make the sales would Rs. 0.5 million.
Financial statements were approved by the Board of Directors on 20th April 20X1.
As at 31st March 20X2, Directors noted that such inventory is still unsold and lying in
the warehouse of the company. Directors believe that inventory is in a saleable
condition and active marketing would result in an immediate sale. Since the market

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 conditions have improved, estimated selling price of inventory is Rs. 11 million and
estimated selling expenses are same Rs. 0.5 million.
What will be the value inventory at the following dates:
(a) 31st March 20X1
(b) 31st March 20X2

Question 23 –
The following is relevant information for an entity:
• Full capacity is 10,000 labour hours in a year.
• Normal capacity is 7,500 labour hours in a year.
• Actual labour hours for current period are 6,500 hours.
• Total fixed production overhead is Rs. 1,500.
• Total variable production overhead is Rs. 2,600.
• Total opening inventory is 2,500 units.
• Total units produced in a year are 6,500 units.
• Total units sold in a year are 6,700 units.
• The cost of inventories is assigned by using FIFO cost formula.
How overhead costs are to be allocated to cost of goods sold and closing inventory?

Question 24 – Sharp Trading Inc.

Sharp Trading Inc. purchases motorcycles from various countries and exports them to
Europe. Sharp Trading has incurred these expenses during 20X1:
(a) Cost of purchases (based on vendors’ invoices) 5,00,000
(b) Trade discounts on purchases 10,000
(c) Import duties 200
(d) Freight and insurance on purchases 250
(e) Other handling costs relating to imports 100
(f) Salaries of accounting department 15,000
(g) Brokerage commission payable to indenting agents for arranging imports 300
(h) Sales commission payable to sales agents 150
(i) After-sales warranty costs 600
Sharp Trading Inc. is seeking your advice as if which of the above item is to be included
in the cost of inventory and wants you to calculate cost of inventory as per Ind AS 2.

Question 25 –
On 1 January 20X1 an entity accepted an order for 7,000 custom-made corporate gifts.
On 3 January 20X1 the entity purchased raw materials to be consumed in the
production process for Rs. 5,50,000, including Rs. 50,000 refundable purchase taxes.
The purchase price was funded by raising a loan of Rs. 5,55,000 (including Rs. 5,000
loan-raising fees). The loan is secured by the inventories.

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 During January 20X1 the entity designed the corporate gifts for the customer.
Design costs included:
• cost of external designer = Rs. 7,000; and
• labour = Rs. 3,000.
During February 20X1 the entity’s production team developed the manufacturing
technique and made further modifications necessary to bring the inventories to the
conditions specified in the agreement. The following costs were incurred in the testing
phase:
• materials, net of Rs.. 3,000 recovered from the sale of the scrapped output
= Rs. 21,000;
• labour = Rs. 11,000; and
• depreciation of plant used to perform the modifications = Rs. 5,000.
During February 20X1 the entity incurred the following additional costs in
manufacturing the customised corporate gifts:
• consumable stores = Rs. 55,000;
• labour = Rs. 65,000; and
• depreciation of plant used to manufacture the customised corporate gifts = Rs.
15,000.
The customised corporate gifts were ready for sale on 1 March 20X1. No abnormal
wastage occurred in the development and manufacture of the corporate gifts.
Compute the cost of the inventory? Substantiate your answer with appropriate
reasons and calculations, wherever required.

Thanks ….

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