Accounting Standard – 2
Inventories Valuation
1.
Applicability
and Nature : This AS is applicable from 01-04-1999 onwards and Mandatory
for SMC, NON-SMC and Level-I,II & III (It means mandatory for all)
2.
Objective:-The
main objective of this AS is to prescribe rule for valuation of inventories
3.
Para-1
AS -2 is not applicable on
(i)
Service provider
(ii)
Shares, Debentures and other financial
instruments
(iii)
WIP of construction contracts.
(iv)
Producers inventory of Livestock, agricultural
and forest product.
4.
Para-3 & 4
Inventory means assets:
(i)
Held for sale in normal course of business
(Finished Goods)
(ii)
Held in the process of production (WIP)
(iii)
Held for consumption for production of goods or
rendering of services. (Raw Material)
NOTE- As per the provision of
AS-2, any specific loose tools should be considered as a part of cost of assets
and should be depreciated over the remaining useful life of assets but common
loose tools should be valued as Raw Material is valued.(ASI-2)
Note:- Stand-by equipment is not
of the nature of spare. It should be treated as separate Fixed Asset and should
be depreciated like other Fixed Assets.
5.
Para-5
Valuation of Inventory:
Inventory is
valued at COST or NRV
whichever is less
Note : Lower will be selected on
item by item basis or category basis but should not be on global basis.
Note:- Producers inventories of
Livestock, agriculture and forest products can be valued at NRV as per
established practice if (a) Sale is assured by a forward contract or by
government guarantee, (b) Market is homogeneous and there is negligible risk of
sale failure.
6.
Para-6
COST: Cost means all cost of purchase, all cost of conversion all other costs incurred in bringing
the inventories to their present condition and location.
Para-7
Purchase cost includes the following:
(i)
Purchase Price
(ii)
Duties and Taxes
(iii)
Freight Inwards
(iv)
Other expenditure directly attributable
(Ex.- Cost
of containers, transit insurance and buying commission etc.)
Following items are either not included
or deducted from cost of purchase:
(i)
Trade Discount
(ii)
Rebate
(iii)
Duties and taxes that are subsequently recovered
by the enterprise from the taxing authorities and
(iv)
Other similar items.
Para-8 & 9
Conversion cost includes the following:
(i)
Direct material, direct labour and direct
expenses (all direct costs)
(ii)
Allocated variable production overheads i.e.
indirect material and indirect labour etc. normally these are allocated on the
basis of actual production.
(iii)
Allocated fixed overhead i.e. depreciation of
machinery and factory building, insurance of factory building and machinery
etc. Normally these are allocated on the basis of normal capacity of
production.
Fixed
production recovery rate is calculated as follow:
= (Fixed
Production Overhead)/ Normal
Production Unit or Actual
Production unit (whichever is
higher)
Para-10-Cost allocation for Joint Products:
Production of Joint Products only:
Calculate Joint Cost and apportion it on
various products on a rational and
consistent basis. Like sale value at split off point , physical quantity method
etc.
Production of Main Products and By
Products:
i)
Compute
joint cost
ii)
Calculate
NRV of By Products
iii)
Calculate
Net Joint cost by reducing NRV out of
Joint Cost
iv)
Apportion
the Net Joint cost on main products on a rational and consistent basis.
NOTE- In case of joint products, when the
cost of conversion of each product are not separately identifiable, they are to
be allocated between the products on a rational and consistent basis. For
example on the basis of sales value at split off point.
Para-11 & 12
Other costs
means:
Cost incurred
in bringing the inventories to their present condition and location is included
in other cost. For example cost of designing the product for certain customers.
Note- Interest
and cost of borrowing is not included in other cost.
Para-13
Following
costs are not included in the cost of inventories:
(i)
Abnormal amount of wasted material, labour, and
production cost.
(ii)
Storage cost, unless these are necessary in the
production process prior to a further production stage.
(iii)
Administrative overhead and selling and
distribution overheads etc.
Formulas to be used to determine cost of
inventories:
(i)
Specific
Identification Method:- this method is used when items of inventory are
not ordinarily interchangeable and goods
and services produced and segregated for a specific project.
(ii)
FIFO
and Weighted average method
(iii)
Standard
cost method:- This is the cost which
is determined taking into account normal levels of consumption of Materials and
supplies, Labour, efficiency and capacity utilization. It should be regularly
reviewed. Standard cost may be used if the results approximates the actual cost
and FIFO or WAM are not applicable.
(iv)
Retail
Price Method:- Cost of Inventory = Sales value of Inventory LESS Gross
Margin. This method may be used if FIFO or WAM are not applicable.
7.
Net
Realizable Value (NRV)
Net Realizable
Value means the estimated selling price in ordinary course of business, less
estimated cost of completion and estimated cost necessary to make the sale.
Para-20 Conditions
under which inventories are valued at NRV
(i)
Damaged
items of inventories.
(ii)
Partial
or Complete Obsolescence.
(iii)
Decline
in selling prices
(iv)
Increase
in the estimated costs of completion or costs necessary to make the sale.
NOTE- Material and other supplies held for the use
in the production of inventories are not written down below the cost if the
finished goods in which they will be used are expected to be sold at or above
cost.
8.
In accordance with Guidance Note on
“Accounting Treatment of Excise Duty” and AS-2, Excise Duty should be
considered as Manufacturing expense and be considered as an element of cost for
Inventory valuation. It is mandatory for an entity to provide for liability for
excise duty on finished goods lying in stock as at the end of the year and add
the same to the value of closing stock.
9.
Para-26 Disclosure
Requirements:
(i)
The accounting policies adopted in measuring
inventories including the cost formulas
(ii)
Carrying amount of inventories and its
classification into Finished Goods, Traded Goods, WIP and RM etc.
(iii)
Any change in the accounting policies adopted and
its impact on the items of Financial Statements.
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