Ind As 2 Inventories 74892bos60524-Cp6-U1

CHAPTER 6
IND AS ON ASSETS OF THE

FINANCIAL STATEMENTS
UNIT 1:
INDIAN ACCOUNTING STANDARD 2: INVENTORIES
LEARNING OUTCOMES
After studying this unit, you will be able to:

 Describe the objective and scope of the standard
 Define the terms inventories, net realisable value and fair value
 Determine the inventory cost
 Apply the cost formula for valuation of inventory
 Evaluate as to how and when to perform write-downs to net realisable
value
 Recognize the write downs as an expense
© The Institute of Chartered Accountants of India

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UNIT OVERVIEW
Objective
• determination of cost
• its subsequent recognition as
an expense
• provides guidance on the
cost formulas
Scope - Applies to all

inventories except
• Ind AS 32 &109 Financial
Disclosure Instruments
• Ind AS 41 Agriculture
Measurement of Inventory
• Valuation Principle
Recognition as an Expense • Cost
• Cost Formulas
• Net Realisable Value

INDIAN ACCOUNTING STANDARD 2 6.3
1.1 OBJECTIVE
The objective of this Standard is to prescribe the accounting treatment for inventories. This
Standard provides guidance for determining the cost of inventories and for subsequent recognition
as an expense, including any write-down to net realisable value.
It provides guidance on the techniques for the measurement of cost, such as the standard cost
method or retail method. It also outlines acceptable methods of determining cost, including
specific identification, first-in-first-out and weighted average cost method.
1.2 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).
Note: In accordance with Ind AS 41 “Agriculture”, inventories comprising agricultural
produce that an entity has harvested from its biological assets are measured on initial
recognition at their fair value less costs to sell at the point of harvest. This fair value
less costs to sell as determined in accordance with Ind AS 41 will become the cost of
the inventories at that date for application of Ind AS 2 “Inventories”.
 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
recognized 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 recognized in profit or loss in the period of the
change.
Broker-traders are those who buy or sell commodities for others or on their own account.
They acquire inventories principally with the purpose of selling in the near future and
generating a profit from fluctuations in price or broker-traders’ margin. When these
inventories are measured at fair value less costs to sell, they are excluded from only
the measurement requirements of this Standard.

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1.3 RELEVANT DEFINITIONS

The following are the key terms used in this standard:
1) 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 and

Held for sale in the supplies to be consumed in the
ordinary course of production process or in the
business rendering of services
Inventories
are assets
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.
Illustration 1
As per Ind AS 2, inventories include ‘materials and supplies awaiting use in the production
process’. Examine whether the packing material and publicity material are covered by the
term ‘materials and supplies awaiting use in the production process’.

Solution
While the primary packing material may be included within the scope of the term ‘materials
and supplies awaiting use in the production process’ but the secondary packing material and
publicity material cannot be so included, as these are selling costs which are required to be
excluded as per Ind AS 2. For this purpose, the primary packing material is one which is
essential to bring an item of inventory to its saleable condition, for example, bottles, cans
etc., in case of food and beverages industry. Other packing material required for transporting
and forwarding the material will normally be in the nature of secondary packing material.
*****
3) 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 realise 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 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.)
Note: Net realisable value for inventories may not equal fair value less costs to sell.
Example 1
An entity holds inventories of 10,000 units and it could sell the same in the market @ 10 each.
The entity has an order in hand to sell the inventories @ 11. The incremental selling cost per unit
is 0.50 per unit. In this situation, fair value is 10 each, but net realisable value is 10.5 each.
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 orderly
entity expects to realise from the transaction to sell the same inventory in
sale of inventory in the ordinary the principal (or most advantageous)
course of business. 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

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1.4 MEASUREMENT OF INVENTORIES

Inventories shall be measured at the lower of cost and net realisable value.
At the lower of
Net realisable
cost value
1) Cost of Inventories
Cost of Inventories comprises:
a) all costs of purchase;
b) costs of conversion; and
c) other costs incurred in bringing the inventories to their present location and condition.
Cost of Purchase
Cost
Conversion Cost
Other cost to bring inventory to present location and condition
2) Cost of purchase
The costs of purchase of inventories include:
a) the purchase price,
b) import duties and other taxes (other than those subsequently recoverable by the entity
from the taxing authorities),
c) transport, handling and

d) other costs directly attributable to the acquisition of finished goods, materials and
services.
Any trade discounts, rebates and other similar items are deducted in determining the costs
of purchase of inventory.
Cost of purchase Purchase Price
Import duties and other taxes
Transport and handling charges
Other cost to bring inventory to present location and condition
Less trade discounts, rebates and other similar items
Illustration 2
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 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 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 5,000 to have the components taken to its warehouse.
Calculate the cost of inventory.
Solution
Purchase price (1,000 x 1,200 x 95%) 11,40,000

Import duties (1,000 x 60) 60,000
Delivery cost 5,000
Cost of inventory 12,05,000
Note: The intention to take settlement discount is irrelevant.
*****

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3) Cost of conversion
 The costs of conversion of inventories include costs directly related to the units of
production, such as:
a) direct material, direct labour and other direct costs; and
b) a systematic allocation of fixed and variable production overheads that are incurred
in converting materials into finished goods.
Direct material
Cost of conversion
Direct labour
Other direct costs
Overheads (fixed and variable production 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, equipment and right-of-use assets used in the production process,
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 an 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 recognized 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.
Note: Production overheads must be absorbed based on normal production capacity
even if this is not achieved in a period. If production capacity is unusual in a particular
period the overheads might be under or over absorbed. Interruptions in production may
occur while costs still are being incurred.

Note: The process of allocating costs to units of production is usually called absorption.
This is usually done by linking the total production overheads to some production
variable, for example, time, wages, materials or simply the number of units expected to
be manufactured.
Example 2
Pluto Ltd. has a plant with the normal capacity to produce 5,00,000 unit of a product
per annum and the expected fixed overheads is 15,00,000. Fixed overheads on
the basis of normal capacity is 3 per unit (15,00,000/5,00,000).
Case 1:
Actual production is 5,00,000 units. Fixed overhead on the basis of normal capacity
and actual overheads will lead to same figure of 15,00,000. Therefore, it is
advisable to include this on normal capacity.
Case 2:
Actual production is 3,75,000 units. Fixed overhead is not going to change with the
change in output and will remain constant at 15,00,000, therefore, overheads on
actual basis is 4 p/u (15,00,000 / 3,75,000).
Hence by valuing inventory at 4 each for fixed overheads purpose, it will be
overvalued and the losses of 3,75,000 will also be included in closing inventory
leading to a higher gross profit than actually earned.
Therefore, it is advisable to include fixed overheads per unit on normal capacity to
actual production (3,75,000 x 3) 11,25,000 and balance 3,75,000 (3,75,000 x 1)
shall be transferred to Profit & Loss Account as an expense.
Case 3:
Actual production is 7,50,000 units. Fixed overheads is not going to change with the
change in output and will remain constant at 15,00,000, therefore, overheads on
actual basis is 2 (15,00,000/ 7,50,000).
Hence by valuing inventory at 3 each for fixed overheads purpose, we will be adding
the element of cost to inventory which actually has not been incurred. At 3 per unit,
total fixed overhead comes to 22,50,000 whereas, actual fixed overhead expense
is only 15,00,000. Therefore, it is advisable to include fixed overhead on actual
basis (7,50,000 x 2) 15,00,000.
Illustration 3: Normal production capacity

A business plans for production overheads of 10,00,000 per annum.
The normal level of production is 1,00,000 units per annum.

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Due to supply difficulties the business was only able to make 75,000 units in the current
year. Other costs per unit were 126.
Calculate the per unit cost and amount of overheads to be expensed during the year.
Solution
Calculation of cost per unit:

Other costs 126
Production overhead (10,00,000/1,00,000 units) 10
Unit cost 136
Overhead to be expensed:
Total production overhead 10,00,000
The amount absorbed into inventory is (75,000 x 10) (7,50,000)
The amount not absorbed into inventory 2,50,000
2,50,000 that has not been included in inventory is expensed during the year i.e.
recognized in the statement of profit and loss.
*****
Illustration 4: Conversion costs
ABC Ltd. manufactures control units for air conditioning systems.
Each control unit requires the following:
1 component X at a cost of 1,205 each
1 component Y at a cost of 800 each
Sundry raw materials at a cost of 150 each
The company incurs the following monthly expenses:
Factory rent 16,500
Energy cost 7,500
Selling and administrative costs 10,000
Each unit takes two hours to assemble. Production workers are paid 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.
Calculate the cost of inventory.

Solution
The cost of a single control unit:
Materials:
Component X 1,205
Component Y 800
Sundry raw materials 150
2,155
Labour (2 hours x 300) 600
Production overhead [(16,500 + 7,500/1,000 hours) x 2 hours] 48
2,803
Note: The selling and administrative costs are not part of 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 recognized 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;
Example 3
The production of whiskey involves the distilling of aged whiskey in a cask prior to
bottling should be capitalised, as aging is integral to making the finished product
saleable.
c) administrative overheads that do not contribute to bringing inventories to their

present location and condition; and
d) selling costs.
 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.

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Ind AS 23 “requires that the borrowing costs shall be capitalised on qualifying assets
but scopes out inventories that are manufactured in large quantities on a repetitive
basis. It also clarifies that inventories manufactured over a short period of time are not
qualifying assets. However, any manufacturer that is producing small quantities over a
long period of time has to capitalise borrowing costs into cost of inventories.
 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 recognized as
interest expense over the period of the financing.
Illustration 5: Conversion costs
A dealer has purchased 1,000 cars costing 2,80,000 each on deferred payment basis
as 25,000 per month per car to be paid in 12 equal instalments.
At year end 31 March 20X1, twenty cars are in stock. Compute the cost of inventory,
finance cost and cost of goods sold.
Solution
Deferred payment price (25,000 x 12) 3,00,000

Less: Cash price 2,80,000
Interest expense 20,000
Cost of inventory 20 cars x 2,80,000 56,00,000

Finance cost 1,000 cars x 20,000 2,00,00,000
Cost of goods sold 980 cars x 2,80,000 27,44,00,000
*****

Inventories are measured at the lower of
Cost of inventories NRV of inventories
Costs of purchase Costs of conversion Other costs
Purchase price
Direct labour Overheads Costs incurred to
bring the
inventories to their
Import duties and present location
other taxes (non- and condition
recoverable from the
taxing authorities)
Fixed production overheads Variable production
(it remain relatively constant overheads (It vary
regardless of the volume of directly, or nearly Borrowing Costs
Transport cost production) directly, with the (Refer Ind AS 23)
volume of production)
Handling other costs

directly attributable to
If AP = NC,
the acquisition of
goods/services then Allocated fixed O/H = Estimated Estimated Estimated
Total fixed O/H Selling price cost of cost
in the completion necessary
ordinary to make
course of
Trade discounts, the sale
business
rebates and other If AP < NC,
similar items are then Allocated fixed O/H =
deducted in AP x cost per unit of fixed
determining the costs O/H (based on NC)
of purchase
Expense recognized in
Profit or loss = Total fixed NRV = Net Realisable Value
O/H - Allocated fixed O/H AP = Actual Production
NC = Normal Capacity
O/H - Overhead
If AP > NC,
then Allocated fixed O/H =
Total fixed O/H
Illustration 6: Cost of Inventory

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

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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.
Solution
Items number 1, 2, 6, 7, 8, 9, 10 are allowed by Ind AS 2 for the calculation of cost of
inventories. Salaries of accounts department, sales commission, and after sale warranty
costs are not considered to be the cost of inventory. Therefore, they are not allowed by Ind
AS 2 for inclusion in cost of inventory and are expensed off in the profit and loss account.
*****
Illustration 7
As per Ind AS 2, selling costs are excluded from the cost of inventories and are required to
be recognized as an expense in the period in which these are incurred. Advise whether the
distribution costs would now be included in the cost of inventories under Ind AS 2.
Solution
Selling and distribution costs are generally used as single term because both are related, as
selling costs are incurred to effect the sale and the distribution costs are incurred by the
seller to complete a sale transaction by making the goods available to the buyer from the
point of sale to the point at which the buyer takes possession. Since these costs are not
related to bringing the goods to their present location and condition, the same are not
included in the cost of inventories. Accordingly, though the word ‘distribution costs’ is not
specifically mentioned in Ind AS 2, these costs would continue to be excluded from the cost
of inventories.
*****

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.
When more than one product is

produced in the process
The outcome is Main

The outcome is
product with a By-
Joint products
product
When the cost of When the cost of When the by-

conversion is When the by-
conversion is not product is
separately separately product is material
immaterial
identifiable identifiable
By-product is By-product is
Allocation of cost is treated as joint
Cost of each measured at NRV
based on relative product and
product is based on and this value is
sales value of each accordingly the
the separate cost deducted from the
product either at accounting is done
incurred cost of the main
the stage in the
production process product
when the products
become separately
identifiable, or at
the completion of
production.

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Illustration 8
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
31.3.20X1
Raw material 14,500 1,50,000 MP1 - 5,000 units 250
Wages - 90,000 MP2 - 4,000 units 100
Fixed overhead - 65,000 BP- 2,000 units
Variable overhead - 50,000
Average market price of MP1 and MP2 is 60 per unit and 50 per unit respectively, by-
product is sold @ 20 per unit. There is a proﬁt of 5,000 on sale of by-product after
incurring separate processing charges of 8,000 and packing charges of 2,000, 5,000
was realised from sale of scrap.
Calculate the value of closing stock of MP1 and MP2 as on 31.3.20X1.
Solution
As per Ind AS 2 ‘Inventories’, most by-products as well as scrap or waste materials, by their
nature, are immaterial. They are often measured at net realisable value and this value is
deducted from the cost of the main product.
1) Calculation of NRV of By-product BP
Selling price of by-product 2,000 units x 20 per 40,000
Less: Separate processing charges of unit
by- product BP (8,000)
Packing charges (2,000)
Net realisable value of by-product BP 30,000
2) Calculation of cost of conversion for allocation between joint products MP1 and
MP2
Raw material 1,50,000
Wages 90,000
Fixed overhead 65,000
Variable overhead 50,000
Less: NRV of by-product BP (See calculation 1) 30,000
Sale value of scrap 5,000 (35,000)
Joint cost to be allocated between MP1 and MP2 3,20,000

3) Determination of “basis for allocation” and allocation of joint cost to MP1 and
MP2
MP I MP 2
Output in units (a) 5,000 4,000
Sales price per unit (b) 60 50
Sales value (a x b) 3,00,000 2,00,000
Ratio of allocation 3 2
Joint cost of 3,20,000 allocated in the ratio of 3:2 (c) 1,92,000 1,28,000
Cost per unit [c/a] 38.4 32
4) Determination of value of closing stock of MP1 and MP2
Particulars MP I MP 2
Closing stock in units 250 units 100 units
Cost per unit 38.4 32
Value of closing stock 9,600 3,200
*****
6) Cost of agricultural produce harvested from biological assets
In accordance with Ind AS 41, Agriculture, inventories comprising agricultural produce that
an entity has harvested from its biological assets are measured on initial recognition at their
fair value less costs to sell at the point of harvest. This is the cost of the inventories at that
date for application of this Standard.
7) Techniques for the measurement of cost
 Techniques for the measurement of the cost of inventories, such as the standard cost
method or the retail method, may be used for convenience if the results approximate to
actual cost.
 Standard Cost Method: Cost is based on normal levels of materials and supplies, labour
efficiency and capacity utilisation. They are regularly reviewed and revised where
necessary.
• Retail method
Measurement techniques
• Standard Cost
 Retail Method: Cost is determined by reducing the sales value of the inventory by the
appropriate percentage gross margin. The percentage used takes into consideration
inventory that has been marked down to below its original selling price. This method is

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often used in the retail industry for measuring inventories of rapidly changing items that
have similar margins.
 The percentage used takes into consideration inventory that has been marked down to
below its original selling price. An average percentage for each retail department is
often used.
 The percentage has to be carefully determined to ensure that it takes into consideration
the circumstances in which inventory has been marked down to below its original selling
price. Adjustments have to be made to eliminate the effect of these markdowns so as
to prevent any item of inventory being valued at less than both its cost and its net
realisable value. An average percentage for each retail department is often used.
Judgement is applied in the retail method in determining the margin to be removed from
the selling price of inventory in order to convert it back to cost.
Illustration 9: Measurement techniques of Cost
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 factory which has made
handbags for the last fifty years. Normally, Mars manufactures 100,000 handbags a
year in their handbag division which uses 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.
Solution
(a) The retail method can be used for measuring inventories of the beauty products. The
cost of the inventory is determined by taking the selling price of the cosmetics and
reducing it by the gross margin of 65% to arrive at the cost.
(b) The handbags can be measured using standard cost especially if the results
approximate cost. Given that the company has the information reliably on hand in

relation to direct materials, direct labour, direct expenses and overheads, it would be
the best method to use to arrive at the cost of inventories.
*****
8) Cost Formulas
An entity shall use the same cost formula for all inventories having a similar nature and use
to the entity. For inventories with a different nature or use, different cost formulas may be
justified. For example, inventories used in one operating segment may have a use to the
entity different from the same type of inventories used in another operating segment.
However, a difference in geographical location of inventories (or in the respective tax rules),
by itself, is not sufficient to justify the use of different cost formulas.
Inventory Valuation
Techniques
Inventory ordinarily Inventory not ordinarily

interchangeable interchangeable
Non Historical
Cost Methods Specific Identification
Historical Cost Method
Methods
(generally used in jewelery
Retail Inventory / Standard Cost and tailor made industries)
Adjusted selling price Method
method
FIFO
It takes into account
normal levels of (and
It is used when large numbers of rapidly
are reviewed
changing items with similar margins are
regularly)
involved
Weighted
Average
materials
Cost is determined by
reducing the sales value Supplies
of the inventory by the
appropriate percentage gross
margin Labour
efficiency
capacity
utilisation

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9) Inventory not ordinarily interchangeable
The cost of inventories of items that are not ordinarily interchangeable and goods or services
produced and segregated for specific projects shall be assigned by using specific
identification of their individual costs. Specific identification of cost means that specific costs
are attributed to identified items of inventory.
10) Inventory ordinarily interchangeable
 The costs of inventories, other than that are not ordinarily interchangeable and goods
or services produced and segregated for specific projects, shall be assigned by using
the first-in, first-out (FIFO) or weighted average cost formula.
First-in, First-out Cost Formula (FIFO) assumes that the items of inventory that were
purchased or produced first are sold first. Hence in such a case, the items remaining
in inventory at the end of the period are those which were most recently purchased or
produced.
For example, in case of a perishable goods business ie food retailers will first sell the
goods he had purchased at the earliest.
The FIFO method, by allocating the earliest costs incurred against revenue, matches
actual cost flows with the physical flow of goods reasonably accurately. In case of other
businesses as well which do not deal in perishable goods, this would reflect what would
probably be a sound management policy. In practice, the FIFO method is generally used
where it is not possible to value inventory on an actual cost basis.
Weighted Average Cost Formula is suitable where inventory units are identical or
nearly identical. It involves the computation of an average unit cost by dividing the total
cost of units by the number of units. The average unit cost then has to be revised with
every receipt of inventory, or alternatively at the end of predetermined periods. In
practice, weighted average systems are widely used in packaged inventory systems that
are computer controlled, although its results are not very different from FIFO in times of
relatively low inflation, or where inventory turnover is relatively fast.
Formula: Calculation of new weighted average after each purchase
Cost of inventory currently in store + Cost of new items received
New weighted average =
Number of units currently in store + Number of new units received
LIFO (last-in, first-out), as its name suggests, is the opposite of FIFO and assumes
that the most recent purchases or production are used first. In certain cases, this could
represent the physical flow of inventory (e.g. if a store is filled and emptied from the
top). However, it is not an acceptable cost formula under Ind AS 2.
LIFO is an attempt to match current costs with current revenues so that profit or loss
excludes the effects of holding gains or losses. Therefore, LIFO is an attempt to achieve
something closer to replacement cost accounting for the statement of profit or loss,

whilst disregarding the statement of financial position. The period-end balance of

inventory on hand represents the earliest purchases of the item, resulting in inventories
being stated in the statement of financial position at amounts which may bear little
relationship to recent cost levels.
Example 4: FIFO and Weighted Average method
Particulars Units Units Actual Cost/unit Actual Total

available sold ( ) Cost ( )
Opening 100 - 2.10 210
inventory
Sale - 75 - -
Purchases 150 - 2.80 420
Sale - 100 - -
Purchase 50 - 3.00 150
Total 300 175 - 780
Solution:
FIFO Method:
Cost of Goods Sold: 100 units x 2.10 + 75 units x 2.80 = 420
Closing Inventory: 50 units x 3.00 + 75 units x 2.80 = 360
Weighted Average Method:
Weighted average cost / units: `780 / 300 units = 2.60
Cost of Goods Sold: 175 units x 2.60 = 455
Closing Inventory: 125 units x 2.60 = 325
Note: Weighted average method in practice is a moving average so computed after
each purchase made and so sales are cost at most recent averages.
Cost of Goods Sold:
75 units @ 2.10 and 100 units @ 2.70 i.e. total cost = 427.50
Closing Inventory: 125 units x 2.82 = 352.50
 An entity shall use the same cost formula for all inventories having a similar nature and
use to the entity. For inventories with a different nature or use, different cost formulas
may be justified.
Illustration 10
State whether an entity can use different cost formulae for inventories held at different
geographical locations having similar nature and use to it.

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Solution
Paragraph 25 of Ind AS 2 prescribes that the cost of inventories, other than the items
of inventories which are not ordinarily interchangeable as dealt with in paragraph 23,
shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula.
An entity shall use the same cost formula for all inventories having similar nature and
use to it. In this case, since the inventories held at different geographical location are
of similar nature and use to the entity, different cost formula cannot be used for inventory
valuation purposes.
*****
 FIFO formula assumes that the items of inventory that were purchased or produced
first are sold first, and consequently the items remaining in inventory at the end of the
period are those most recently purchased or produced.
 Under the weighted average cost formula, the cost of each item is determined from the
weighted average of the cost of similar items at the beginning of a period and the cost
of similar items purchased or produced during the period. The average may be
calculated on a periodic basis, or as each additional shipment is received, depending
upon the circumstances of the entity.
Specific identification of items of

Other items of inventory
inventory
Apply either :
Identified actual costs
First-in first - out
Weighted Average
Illustration 11
Mercury Ltd. uses a periodic inventory system. The following information relates to
20X1-20X2.
Date Particular Unit Cost p.u. Total Cost
April Inventory 200 10 2,000
May Purchases 50 11 550
September Purchases 400 12 4,800
February Purchases 350 14 4,900
Total 1,000 12,250
Physical inventory at 31.3.20X2 400 units.

Calculate ending inventory value and cost of sales using:

(a) FIFO
(b) Weighted Average
Solution
FIFO inventory 31.3.20X2 350 @14 = 4,900

50 @ 12 = 600
5,500
Cost of Sales 12,250-5,500 = 6,750
Weighted average cost per item 12,250/1000 = 12.25
Weighted average inventory at 31.3.20X2 400 x 12.25 = 4,900
Cost of sales 20X1-20X2 12,250-4,900 = 7,350
*****
11) Net realisable value
Measurement of 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. 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.
Illustration 12
Recommend 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
Solution
Ind AS 2 defines Net Realisable Value as 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.”
Costs of completion of work-in-progress are incurred to convert the work-in progress
into finished goods. Since these costs are in the nature of completion costs, in
accordance with the above definition, the same should be deducted from the estimated
selling price to determine the NRV of work-in- progress.

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Trade discount is a reduction granted by a supplier from the list price of goods or
services on business considerations other than for prompt payment.
Trade discount is allowed either expressly through an agreement or through prevalent
commercial practices in the terms of the trade and the same is adjusted in arriving at
the selling price. Accordingly, the trade discount expected to be allowed should be
deducted to determine the estimated selling price.
Cash discount is a reduction granted by a supplier from the invoiced price in
consideration of immediate payment or payment within a stipulated period.
These types of costs are incurred to recover the sale proceeds immediately or before
the end of the specified period or credit period allowed to the customer. In other words,
these costs are not incurred to make the sale, therefore, the same should not be
considered while determining NRV.
*****
 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.
Example 5
A loss realised on a sale of a product after the end of the period may well provide
evidence of the net realisable value of that product at the end of the period. However,
if this product is, for example, an exchange traded commodity, and the loss realised can
be attributed to a fall in prices on the exchange after the period end date, then this loss
would not, in itself, provide evidence of the net realisable value at the period end date.
Illustration 13
ABC Ltd. manufactures and sells paper envelopes. The stock of envelopes was
included in the closing inventory as of 31 st March, 20X1, at a cost of 50 per pack.
During the final audit, the auditors noted that the subsequent sale price for the inventory
at 15 th April, 20X1, was 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 15 per pack for
repairing and reapplying glue to the envelopes.
Calculate the net realisable value and inventory write-down (loss) amount.

Solution
The net realisable value is the expected sale price 40, less cost incurred to bring the
goods to its saleble condition ie 15.
Thus, NRV of envelopes pack = 40 – 15 = 25 per pack.
The loss (inventory write-down) per pack is the difference between cost and net
realisable value = 50 – 25= 25 per pack.
*****
 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 quantity is based on general selling prices. If there is a firm contract to sell
quantities in excess of inventory quantities that the entity holds or is able to obtain under
a firm purchase contract, this may give rise to an onerous contract liability that should
be provided for in accordance with Ind AS 37 “Provisions, Contingent Liabilities and
Contingent Assets”.
Illustration 14
At the end of its financial year, Company P has 100 units of inventory on hand recorded
at a carrying amount of 10 per unit. The current market price is 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 11 per unit, which cannot be settled net. Estimated incremental selling
cost is 1 per unit.
Compute Net Realisable Value (NRV) of the inventory of Company P.
Solution
While performing NRV test, the NRV of 60 units that will be sold to Company Q is
10 per unit (i.e. 11-1).
NRV of the remaining 40 units is 7 per unit (i.e. 8-1).
Therefore, Company P will write down those remaining 40 units by 120 (i.e. 40 x 3).
Total cost of inventory would be
Goods to be sold to Company Q 60 units x 10 + 600
Remaining goods 40 unit x 7 280
880
*****

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 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. The
cost and net realisable value should be compared for each separately identifiable item
of inventory, or group of similar inventories, rather than for inventory in total.
Illustration 15
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:
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
Calculate the value of closing inventory in the financial statements of a business.
Solution
The value of closing inventory in the financial statements:
Item of Cost NRV (Estimated Sales Measurement base Value
inventory price- Selling costs) (lower of cost or NRV)
A1 8,000 (7,800 – 500) 7,300 NRV 7,300
A2 14,000 (18,000 – 200) 17,800 Cost 14,000
B1 16,000 (17,000 – 200) 16,800 Cost 16,000
C1 6,000 (7,500 – 150) 7,350 Cost 6,000
Value of Inventory 43,300
*****
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 used are expected to be sold at or
above cost. This is the case even if these materials in their present condition have a net
realisable value that is below cost and would therefore otherwise require write down.

Example 6
A whisky distiller would not write down an inventory of grain because of a fall in the grain
price, so long as it expects to sell the whisky at a price which is sufficient to recover 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. In other words, if an entity writes down any of its
finished goods, the carrying value of any related raw materials should also be reviewed to
see if they too need to be written down.
Often raw materials are used to make a number of different products. In these cases, it is
normally not possible to arrive at a particular net realisable value for each item of raw material
based on the selling price of any one type of finished item. If the current replacement cost of
those raw materials is less than their historical cost, a provision is only required to be made if
the finished goods into which they will be made are expected to be sold at a loss. No provision
should be made just because the anticipated profit will be less than normal.
Material and other supplies held for use in the

product of inventory
When finished goods are sold at When finished goods are sold at
or above cost NRV
Raw material is measured at

Raw material is measured at
replacement cost measured
cost
as NRV
Illustration 16
Particulars Kg. `
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

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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 20 per kg and the replacement
cost for the raw material was 9.50 per kg on the closing day. Calculate the closing inventory
as on that date.
Solution
Calculation of cost for closing inventory
Particulars
Cost of Purchase (10,200 x 10) 1,02,000
Direct Labour 76,500
75,000 x 10,200 51,000
Fixed Overhead
15,000
Cost of Production 2,29,500

Cost of closing inventory per unit (2,29,500/10,200) 22.50
Net Realisable Value per unit 20.00
Since net realisable value is less than cost, closing inventory will be valued at 20.
As NRV of the finished goods is less than its cost, relevant raw materials will be valued at
replacement cost i.e. 9.50.
Therefore, value of closing inventory: Finished Goods (1,200 x 20) 24,000
Raw Materials (900 x 9.50) 8,550
32,550
*****
Reversals of write-downs
 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.

 This occurs, for example, when an item of inventory that is carried at net realisable value,
because its selling price has declined, is still on hand in a subsequent period and its selling
price has increased.
Illustration 17
Sun Pharma Limited, a renowned company in the field of pharmaceuticals has the following
four items in inventory: The cost and net realisable 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
Total 14,600 14,540
Calculate the value of Inventories:
a. On an item by item basis
b. On a group basis
Solution
Inventories shall be measured at the lower of cost and net realisable value.
Item by item basis:

A 1,900
B 5,000
C 4,400
D 2,990
14,290
Group basis 14,540
*****
1.5 RECOGNITION AS AN EXPENSE

1) The amount of inventories recognized as an expense in the period will generally be:

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a) carrying amount of the inventories sold in the period in which related revenue is
recognized; and
b) the amount of any write-down of inventories to net realisable value and all losses of
inventories shall be recognized 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 recognized 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 recognized as an expense during the useful life of that asset
through charging of depreciation on that asset.
Example 7
An item of inventory costing 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 80,000. Such Inventory
needs to be capitalised 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 20,000 per
annum (i.e. 1,00,000 / 5)
1.6 DISCLOSURE
The financial statements shall disclose:
1) Accounting policies
The accounting policies adopted in measuring inventories, including the cost formula used.
2) Analysis of carrying amount
The total carrying amount of inventories and the carrying amount in classifications
appropriate to the entity.
Common classifications of inventories are as follows:
a) Merchandise;
b) Production supplies;
c) Materials;

d) Work in progress; and

e) Finished goods.
The inventories of a service provider may be described as work in progress
3) Inventories carried at fair value less costs to sell
The carrying amount of inventories carried at fair value less costs to sell.
4) Amounts recognized in profit or loss
a) the amount of inventories recognized as an expense during the period;
b) the amount of any write-down of inventories recognized as an expense in the period;
and
c) the amount of any reversal of any write-down that is recognized as a reduction in the
amount of inventories recognized as expense in the period.
In addition, disclosure is required of the circumstances or events that led to the reversal
of a write-down of inventories.
5) Inventories pledged as security
The carrying amount of inventories pledged as security for liabilities.
An entity adopts a format for profit or loss that results in amounts being disclosed other than the
cost of inventories recognized as an expense during the period. Under this format, the entity
presents an analysis of expenses using a classification based on the nature of expenses. In this
case, the entity discloses the costs recognized as an expense for raw materials and consumables,
labour costs and other costs together with the amount of the net change in inventories for the
period.
1.7 EXTRACTS OF FINANCIAL STATEMENTS OF LISTED

ENTITIES
Following are the extracts from the financial statements of the listed entity ‘Titan Company Limited’
for the financial year 2021-2022 with respect to ‘Inventories’ and its accounting policy thereon.

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ACCOUNTING POLICY
Inventories
Inventories [other than quantities of gold for which the price is yet to be determined
with the suppliers (Unfixed gold) or where hedge contracts have been entered into for
quantities of gold and accounted for as fair value hedge] are stated at the lower of cost
and net realisable value determined on an item-by-item basis. Cost is determined as
follows:
a) Gold is valued on first-in-first-out basis.
b) Stores and spares, loose tools and raw materials are valued on a moving weighted
average rate.
c) Work-in-progress and finished goods (other than gold) are valued on full
absorption cost method based on the moving average cost of production.
d) Traded goods are valued on a moving weighted average rate/cost of purchases.
Cost comprises all costs of purchase including duties and taxes (other than those
subsequently recoverable by the Company), freight inwards and other expenditure

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directly attributable to acquisition. Work-in-progress and finished goods include

appropriate proportion of overheads and, where applicable, other taxes.
Unfixed gold and quantities of gold covered under fair value hedge have been entered
into is valued at gold prices prevailing on the period closing date.
Net realisable value represents the estimated selling price for inventories less estimated
costs of completion and costs necessary to make the sale.
(Source: Annual Report 2021-2022 – Titan Company Limited)
1.8 SIGNIFICANT DIFFERENCES IN IND AS 2 VIS-À-VIS AS 2

S. Particular Ind AS 2 AS 2
No.
1. Subsequent Ind AS 2 deals with the AS 2 does not provide the

Recognition subsequent recognition of cost / same.
carrying amount of inventories
as an expense.
2. Inventory held by Ind AS 2 does not apply to This aspect is not there in
Commodity Broker- measurement of inventories the AS 2.
traders held by commodity broker-
traders, who measure their
inventories at fair value less
costs to sell.
3. Definition of Fair Ind AS 2 defines fair value and AS 2 does not contain the
Value and Distinction provides an explanation in definition of fair value and
Between NRV and respect of distinction between such explanation.
Fair Value ‘net realisable value’ and ‘fair
value’.
4. Subsequent Ind AS 2 provides detailed AS 2 does not deal with such

Assessment of NRV guidance in case of subsequent reversal.
assessment of net realisable
value. It also deals with the
reversal of the write-down of
inventories to net realisable
value to the extent of the
amount of original write-down,
and the recognition and

disclosure thereof in the

financial statements.
5. Exclusion from its Ind AS 2 excludes from its scope AS 2 excludes from its
Scope but Guidance only the measurement of scope such types of
given inventories held by producers of inventories.
agricultural and forest products,
agricultural produce after
harvest, and minerals and
mineral products though it
provides guidance on
measurement of such
inventories.
6. Cost Formulae Ind AS 2 requires the use of AS 2 specifically provides

consistent cost formulas for all that the formula used in
inventories having a similar determining the cost of an
nature and use to the entity. item of inventory should
reflect the fairest possible
approximation to the cost
incurred in bringing the
items of inventory to their
present location and
condition.

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FOR SHORTCUT TO IND AS WISDOM: SCAN ME!
TEST YOUR KNOWLEDGE

Questions
1. UA Ltd. purchased raw material @ 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 realisable value of
the raw material for valuation of inventories at the end of the year. However, replacement
cost of raw material is 300 per kg. Compute the value of inventory of raw material?
2. 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) 85 lakhs
Solar power panel (finished products) 55 lakhs
Sundry Debtor (solar power panel) 65 lakhs
The petition for winding up against the customer has been filed during 20X2-20X3 by
Sun Ltd. Advise on provision to be made of 205 lakh included in Sundry Debtors, Finished
goods and work-in-progress in the financial statement of 20X2-20X3.

3. 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
10 million and based on retail prices at 31 March 20X1, the expected selling price of the
spare parts is 12 million. On 15 April 20X1, due to market fluctuations, expected selling
price of the spare parts in stock is reduced to 8 million. The estimated selling expense
required to make the sales would 0.5 million. Financial statements were approved by the
Board of Directors on 20 th April 20X1.
As at 31 st 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 conditions have
improved, estimated selling price of inventory is 11 million and estimated selling expenses
are same 0.5 million.
Determine the value inventory at the following dates:
(a) 31 st March 20X1
(b) 31 st March 20X2
4. The following information is gathered from 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 1,500.
 Total variable production overhead is 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.
Determine the overhead costs to be allocated to cost of goods sold and closing inventory?
5. 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

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(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
Advise 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.
6. 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 5,50,000, including 50,000 refundable purchase taxes. The purchase price
was funded by raising a loan of 5,55,000 (including 5,000 loan-raising fees). The loan is
secured by the inventories.
During January 20X1 the entity designed the corporate gifts for the customer.
Design costs included:
 cost of external designer = 7,000; and
 labour = 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 3,000 recovered from the sale of the scrapped output = 21,000
 labour = 11,000
 depreciation of plant used to perform the modifications = 5,000
During February 20X1 the entity incurred the following additional costs in manufacturing the
customised corporate gifts:
 consumable stores = 55,000
 labour = 65,000
 depreciation of plant used to manufacture the customised corporate gifts = 15,000
The customised corporate gifts were ready for sale on 1st 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.

Answers
1. As per Ind AS 2 “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 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 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. Therefore, in this case, UA Ltd. will value the inventory of raw
material at 30,00,000 (10,000 kg. @ 300 per kg.).
2. From the facts given in the question it is obvious that Sun Ltd. is a manufacturer of solar
power panel. As per Ind AS 2 ‘Inventories’, inventories are assets (a) held for sale in the
ordinary course of business; (b) in the process of production for such sale; or (c) in the form
of materials or supplies to be consumed in the production process or in the rendering of
services. Therefore, solar power panel held in its stock will be considered as its inventory.
Further, as per the standard, inventory at the end of the year is to be valued at lower of cost
or NRV.
As the customer has postponed the delivery schedule due to liquidity crunch the entire cost
incurred for solar power panel which were to be supplied has been shown in Inventory. The
solar power panel are in the possession of the Company which can be sold in the market.
Hence, the company should value such inventory as per principle laid down in Ind AS 2 i.e.
lower of Cost or NRV. Though, the goods were produced as per specifications of buyer the
Company should determine the NRV of these goods in the market and value the goods
accordingly. Change in value of such solar power panel should be provided for in the books.
In the absence of the NRV of WIP and Finished product given in the question, assuming that
cost is lower, the company shall value its inventory as per Ind AS 2 for 140 lakhs [i.e solar
power panel (WIP) 85 lakhs + solar power panel (finished products) 55 lakhs].
Alternatively, if it is assumed that there is no buyer for such fabricated solar power panel,
then the NRV will be Nil. In such a case, full value of finished goods and WIP will be provided
for in the books.
As regards Sundry Debtors balance, since the Company has filed a petition for winding up
against the customer in 20X2-20X3, it is probable that amount is not recoverable from the
party. Hence, the provision for doubtful debts for 65 lakhs shall be made in the books
against the debtor’s amount.
3. As per Ind AS 2 ‘Inventories’, inventory is measured at lower of ‘cost’ or ‘net realisable value’.
Further, as per Ind AS 10: ‘Events after Balance Sheet Date’, decline in net realisable value
below cost provides additional evidence of events occurring at the balance sheet date and
hence shall be considered as ‘adjusting events’.

6.40 a
2.40 FINANCIAL
v
REPORTING
v
(a) In the given case, for valuation of inventory as on 31 March 20X1, cost of inventory
would be 10 million and net realisable value would be 7.5 million (i.e. Expected
selling price 8 million - estimated selling expenses 0.5 million). Accordingly,
inventory shall be measured at 7.5 million i.e. lower of cost and net realisable value.
Therefore, inventory write down of 2.5 million would be recorded in income statement
of that year.
(b) As per para 33 of Ind AS 2, a new assessment is made of net realisable value in each
subsequent period. It inter alia states that if there is increase in net realisable value
because of changed economic circumstances, the amount of write down is reversed so
that new carrying amount is the lower of the cost and the revised net realisable value.
Accordingly, as at 31 March 20X2, again inventory would be valued at cost or net
realisable value whichever is lower. In the present case, cost is 10 million and net
realisable value would be 10.5 million (i.e. expected selling price 11 million –
estimated selling expense 0.5 million). Accordingly, inventory would be recorded at
10 million and inventory write down carried out in previous year for 2.5 million shall
be reversed.
4. Hours taken to produce 1 unit = 6,500 hours / 6,500 units = 1 hour per unit.
Fixed production overhead absorption rate:
= Fixed production overhead / labour hours for normal capacity
= 1,500 / 7,500
= 0.2 per hour
Management should allocate fixed overhead costs to units produced at a rate of 0.2 per
hour.
Therefore, fixed production overhead allocated to 6,500 units produced during the year (one
unit per hour) = 6,500 units x1 hour x 0.2 = 1,300.
The remaining fixed overhead incurred during the year of 200 ( 1500 – 1300) that
remains unallocated is recognized as an expense.
The amount of fixed overhead allocated to inventory is not increased as a result of low
production by using normal capacity to allocate fixed overhead.
Variable production overhead absorption rate:
= Variable production overhead/actual hours for current period
= 2,600 / 6,500 hours
= 0.4 per hour
Management should allocate variable overhead costs to units produced at a rate of 0.4 per
hour.

The above rate results in the allocation of all variable overheads to units produced during
the year.
Closing inventory = Opening inventory + Units produced during year – Units sold during year
= 2,500 + 6,500 – 6,700 = 2,300 units
As each unit has taken one hour to produce (6,500 hours / 6,500 units produced), total fixed
and variable production overhead recognized as part of cost of inventory:
= Number of units of closing inventory x Number of hours to produce each unit x (Fixed
production overhead absorption rate + Variable production overhead absorption rate)
= 2,300 units x 1 hour x ( 0.2 + 0.4)
= 1,380
The remaining 2,720 [( 1,500 + 2,600) – 1,380] is recognized as an expense in the
income statement as follows:
Absorbed in cost of goods sold (FIFO basis) (6,500 – 2,300) = 4,200 x 0.6 2,520
Unabsorbed fixed overheads, not included in the cost of goods sold 200
Total 2,720
5. Items (a), (b), (c), (d), (e), and (g) are permitted to be included in the cost of inventory since
these elements contribute to cost of purchase, cost of conversion and other costs incurred
in bringing the inventories to their present location and condition, as per Ind AS 2
Statement showing cost of inventory
Cost of purchases (based on vendors’ invoices) 5,00,000

Trade discounts on purchases (10,000)
Import duties 200
Freight and insurance on purchases 250
Other handling costs relating to imports 100
Brokerage commission payable to indenting agents for arranging imports 300
Cost of inventory under Ind AS 2 4,90,850
Note: Salaries of accounting department, sales commission, and after-sales warranty

costs are not considered as part of cost of inventory under Ind AS 2.

6.42 a
2.42 FINANCIAL
v
REPORTING
v
6. Statement showing computation of inventory cost
Particulars Amount Remarks
( )
Costs of purchase 5,00,000 Purchase price of raw material [purchase
price ( 5,50,000) less refundable
purchase taxes ( 50,000)]
Loan-raising fee – Included in the measurement of the
liability
Costs of purchase 55,000 Purchase price of consumable stores
Costs of conversion 65,000 Direct costs—labour
Production overheads 15,000 Fixed costs—depreciation
Production overheads 10,000 Product design costs and labour cost for
specific customer
Other costs 37,000 Refer working note
Borrowing costs Recognized as an expense in profit or loss
Total cost of inventories 6,82,000
Working Note:
Costs of testing product designed for specific customer:
21,000 material (ie net of the 3,000 recovered from the sale of the scrapped output) +
11,000 labour + 5,000 depreciation.

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CHAPTER 6

IND AS ON ASSETS OF THE

After studying this unit, you will be able to:

© The Institute of Chartered Accountants of India

Scope - Applies to all

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

1.3 RELEVANT DEFINITIONS

In the form of materials and

2) Inventories encompass of:

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

1.4 MEASUREMENT OF INVENTORIES

Other cost to bring inventory to present location and condition

© The Institute of Chartered Accountants of India

Import duties and other taxes

Transport and handling charges

Other cost to bring inventory to present location and condition

Less trade discounts, rebates and other similar items

Purchase price (1,000 x 1,200 x 95%) 11,40,000

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Other direct costs

Overheads (fixed and variable production overheads)

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Illustration 3: Normal production capacity

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Calculation of cost per unit:

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c) administrative overheads that do not contribute to bringing inventories to their

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Deferred payment price (25,000 x 12) 3,00,000

Cost of inventory 20 cars x 2,80,000 56,00,000

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Inventories are measured at the lower of

Cost of inventories NRV of inventories

Costs of purchase Costs of conversion Other costs

Handling other costs

Illustration 6: Cost of Inventory

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© The Institute of Chartered Accountants of India

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

When more than one product is

The outcome is Main

When the cost of When the cost of When the by-

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© The Institute of Chartered Accountants of India

4) Determination of value of closing stock of MP1 and MP2

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© The Institute of Chartered Accountants of India

Inventory ordinarily Inventory not ordinarily

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© The Institute of Chartered Accountants of India

whilst disregarding the statement of financial position. The period-end balance of

Particulars Units Units Actual Cost/unit Actual Total

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Specific identification of items of

© The Institute of Chartered Accountants of India

Calculate ending inventory value and cost of sales using:

FIFO inventory 31.3.20X2 350 @14 = 4,900