Accounting Standard 2

ACCOUNTING STANDARD 2
VALUATION OF INVENTORY
1. Scope
Following are excluded from the scope of AS 2
 Work in progress arising under construction contracts (AS 7)
 Work in progress arising in the ordinary course of business of service
 Shares, debentures, and other financial instruments held as stock-in-
trade.
Valued at lower of cost and fair value.
 Producers’ inventories of livestock, agricultural and forest products,
and mineral oils, ores and gases to the extent that they are measured
at net realisable value.

2. MEANING OF INVENTORIES
Inventories are assets which are
 Held for sale in ordinary course of business
 Held in the process of production
 Held in the form of material or supplies to be consumed in the process
of production or rendering of services.

3. VALUATION OF INVENTORY (ON REPORTING DATE)

Lower of
(a) Cost
(b) NRV

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 Accounting Standard 2

4. COST PRICE

Inclusions Exclusions
 Administrative expenses.
(a)Cost of purchase
Invoice price XXX  Selling & Distribution Expenses

(-) Trade discount (XXX)  Abnormal loss

(+) Non-refundable duties & XXX  Storage cost (unless it is necessary

taxes credit is not available) for production)

(+) Direct expenses to bring XXX  Borrowing cost (subject to AS 16)

Inv. In present location
Cost of purchase XXX

(b)Cost of conversion
Direct labour XXX

Production OH XXX
 Variable OH  Allocated to
each unit based on actual
production

 Fixed OH  Allocated to each

unit based on normal
production (or) actual
production whichever is
higher

(c) Other costs

Expenses to bring the inventory to
condition eligible for sale

Example: Packing cost, Transfer from

factory to warehouse, modification
expenses

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 Accounting Standard 2

5. SPECIAL CASES
(a) Joint product: Joint cost is allocated based on “sales ratio of each
joint product either
 At the time of split-off (or)
 On completion of production
(b) By Product: If the amount is immaterial, it must be measured at
NRV and deducted from the cost of main product

6. NET REALISABLE VALUE

(a) For finished goods / Stock in trade
Estimated selling price of finished good XXX
(-) Estimated selling expenses of FG XXX
NRV of FG XXX
(b) For WIP
Estimated selling price of finished good XXX
(-) Estimated selling expenses of FG XXX
NRV of FG XXX
(-) Cost to complete (estimated) XXX
NRV of WIP XXX
(c) Raw material

If FG in which RM will be incorporated is

expected to be sold

>=CP of FG At < CP of FG

Value RM at lower of Its

Value RM at cost price of cost price and Its
raw material replacement cost

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 Accounting Standard 2

7. COST FORMULA

Cost Formula

Inventory, not ordinarily Inventory, ordinarily

interchangeable interchangeable

Historical cost Non-historical cost

Specific methods methods
identificati
on method
Adjusted
FIFO
SellingPrice

Weighted
Average Standard cost
Price

8. Comparison of NRV & Cost price –

 The comparison should be made on item- by-item basis.
 In some cases, it may be appropriate to group similar or related items.

9. Review of net realisable value at each balance sheet date

 An assessment is made of net realisable value as at each balance sheet date.

10. DISCLOSURES
 The accounting policies adopted in measuring inventories
 the cost formula used
 The total carrying amount of inventories together with a classification
appropriate to the enterprise.
Common classifications of inventories are
 raw materials,
 work in progress,
 finished goods,
 Stock-in-trade (in respect of goods acquired for trading),
 stores and spares,
 loose tools

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