Accounting Standard - 2 | Valuation of Inventories | Financial Accounting Notes | B.Com 1st Sem | CBCS Pattern

 Accounting Standard – 2: Valuation of Inventories
Financial Accounting Notes

Accounting standard 2 deals with the determination of value at which inventories are carried in the financial statements, including the ascertainment of cost of inventories and any write-down thereof to net realisable value. This standard is applicable to all the companies irrespective of their level.

According to AS – 2, inventories includes:

a)    Inventories held for sale in the ordinary course of business or

b)   Work-in-progress; or

c)    In the form of materials or supplies to be consumed in the production process or in the rendering of services.

But inventories do not include spare parts, servicing equipment and standby equipment.

Valuation of Inventories:

Inventories are valued at cost or market price whichever is lower except the following:

a)    Shares, debentures and other financial instruments held as stock in trade.

b)   Live stocks and agricultural products valued at net realisable value.

c)    Work in progress in the service and construction business.

Cost of Inventories:

Cost of inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present condition and location.

Costs of purchase include:

a)    Purchase price excluding trade discounts, rebates, etc.

b)   Duties and taxes other than refundable duties and taxes

c)    Freight inwards

d)   Other expenditure directly attributable to the acquisition

Costs of conversion include:

a)    All the cost directly related to production such as direct labour.

b)   Allocation of fixed production overheads based on normal capacity.

c)    Variable production overheads assigned to each unit of production on the basis of the actual use of production facilities

Other costs: All other costs which are incurred to bring the inventories to their present conditions and locations such as designing, packaging, transportation etc. But other costs do not include:

a)    Abnormal wastage

b)   Storage costs unless necessary in the production process prior to a further production stage

c)    Selling and Distribution costs

d)   Administrative overheads that do not contribute to bringing the inventories to their present location and condition

e)   Unallocated overheads

Methods of valuation of inventories:

The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs.

For other inventories, cost can be assigned by using the first-in, first-out (FIFO), or weighted average cost formula, whichever reflects the fairest possible approximation to the cost incurred in bringing the inventories to their present location and condition.

However, when it is difficult to calculate the cost using above methods, Standard cost and Retail cost can be used if the results approximate the actual cost.