Accounting Standard 2

Accounting Standard: 2 Valuation of Inventories

Accounting Standard-2 deals with: • Determination of value at which inventories are carried in B/S, • Ascertainment of cost (manner), • Situation in which carrying cost of inventories is written below cost.

Inventories are assets: • held for sale in ordinary course of business, • in the process of production for such sale,or • in the form of material or supplies to be consumed in the production process or in the rendering of services.

Measurement: Inventories should be valued at lower of Cost and Net realisable value.

Net Realisable Value = Estimated selling price – Estimated cost necessary to make sale.

Cost of Inventories: These include all cost of purchase, cost of conversion and other cost incurred in bringing the inventories to their present location and condition. But does not include: i) abnormal amount, ii) storage cost unless necessary in the production, iii) administrative overhead, iv) selling and distribution cost. • Cost of Purchase: Purchase price net of Trade discount, Rebate, etc. • Cost of conversion: include cost directly related to unit of production i.e. direct wages, variable overhead, allocable fixed overhead.

Cost Formula: Valuation of inventories depend on cost formula used by entity: a) Specific identification method, b) FIFO, c) Weighted Average, d) Standard Cost, e) Retail Method (for retail trader).

• Application of formula: Cost formula is applied in in item by item except one situation. • Inventories are not written down below cost if finished product of such inventory are expected to be sold at above cost.

Disclosure: • Accounting policy adopted in measuring including cost formula used, • Total carrying cost of inventories and its classification.

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