4 Valuation of Inventories( as 2) 2009

7/31/2019 4 Valuation of Inventories( as 2) 2009

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Valuation of Inventories( AS-2)Purpose: To formulate the method of valuation

of inventories on hand for Balance Sheetpurposes.

Inventories include:1) Finished goods held for sale in the ordinary

course of business.2) Raw material/WIP in the process of

production of such sale.3) Material and spares to be consumed for

such production( does not includemachinery)

4) Spares which are used in common with allfixed assets.


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Valuation of Inventories( AS-2)

Does not include:-

1) WIP directly related to constructioncontract or service contracts.

2) WIP of service providers.

3) Financial instruments held as stock

in trade.4) Producers inventories like livestock,

mineral oil, ore, gas etc.


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Cost of inventory includes:

1) Cost of purchases.a) Purchase price

b) Duties and taxes

c) Freight inward

d) Other exp. Attributed to acquisition.

Less: a) duties /taxes recoverable fromgovt.

b) Trade discount ( c ) rebate

d) Duty draw back e) other

similar items.


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Cost of Inventory includes:-

2) Cost of conversion-

1) Direct Labour/Material/expenses.

2) Fixed production overheads.( on normalcapacity)

3) Variable production overheads.( on actualproduction)

4) In case of joint products- rational andconsistent allocation

5) Scrap/by-product net realizable valuededucted from costs.


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Inclusion of excise duty in valuationof finished goods- as applicable onthe balance sheet date. ( neutral

effect)

Care! Production for exports.


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Exclusions from cost ofinventories:-

1) Abnormal costs, wastage etc.

2) Storage costs

3) Administrative overheads

4) S & D costs.5) Interest & borrowing costs.


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Cost of inventories determined by:-

1) Specific identification method.2) FIFO or weighted average cost.

3) Standard cost.

4) Retail Method( target cost)


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Net Realisable Value (NRV)

Is the estimated selling price lessestimated cost of completion andestimated cost necessary to makethe sale.

Calculated on each Balance Sheetdate.


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Estimation of NRV:-

a) If finished product in which raw materialand supplies used is sold at or above the

cost , then estimated NRV of Rawmaterial and supplies is shown at itscost.

b) If finished goods in which raw material

and supplies used is sold below the cost,then the estimated NRV of raw materialand supplies is equal to replacementprice of raw material and supplies.


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MODVAT and now CENVAT

(wef-1-4-2000):-

For Income Tax purpose:- Inventorycosts include CENVAT paid on theitem.

For Balance Sheet purpose:- CENVATamount debited to separate accountas receivables.( AS-2)


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AS-2-Inventory-Summary of key Points

Acctg. Policy to be used- FIFO/WACCost Formula to be used- AbsorptionCosting/ Standard costing/ Targetcosting

Class of inventories-FG/WIP/RM/Spares.In case of WIP- Net Realisable Vaue

Abnormal wastage- DR. P &L accountNormal Wastage- absorbed by prodn.Cenvat- Inclusive or exclusive method .


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AS-2- Inventory

Value Raw material at Cost if the Sellingprice is more than the total cost ofproduction of Finished Goods.

If Selling Price is less than cost ofproduction- value Raw Material atreplacement Cost.

If the difference between cost and Selling

price of FG is 5% or less, only thedifference can be reduced from RawMaterial cost.

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4 Valuation of Inventories( as 2) 2009