Valuation of Inventories
This Standard 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.
What to exclude in inventories as per AS2 definition ? Excluded inventories (not dealt with by AS 2) work in progress arising under construction contracts work in progress arising in the ordinary course of business of service providers shares, debentures and other financial instruments held as stock-in-trade
What is inventory or inventory Definition as per AS2?
Inventories are assets which are held for sale in the ordinary course of business; in the process of production for such sale; or in the form of materials or supplies to be consumed in the production process or in the rendering of services.
****** Note Please—————->>>>>>Do not include spare parts, servicing equipment and standby equipment which meet the definition of PPE as per AS 10.
How Inventory is valued ?
Inventory is valued or Measurement- lower of cost and net realisable value
Net realisable value -Estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale Assessment to be made at each balance sheet date.
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. Things to include and exclude in calculating cost of inventories :
Costs of purchase
- Purchase price excluding trade discounts, rebates, etc.
- Duties and taxes other than refundable duties and taxes freight inwards
- Other expenditure directly attributable to the acquisition
Costs of conversion
- Allocation of fixed production overheads based on normal capacity
- Variable production overheads assigned to each unit of production on the basis of the actual use of production facilities
- Exclusions
- Abnormal wastage
- Storage costs unless necessary in the production process
- prior to a further production stage
- Selling and Distribution costs
- Administrative overheads that do not contribute to bringing the inventories to their present location and condition
- Unallocated overheads
Exception- 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.
Cost Formulas: 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.