IND AS 2 : VALUATION OF

INVENTORY
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WHAT IS “INVENTORY”?
 Inventories are Assets:
a) Held for sale in the ordinary course of business (Finished
Goods).
b) Use in the process of production for such sale Like Raw
material and WIP etc..
c) To be consumed in the production process or rendering the
services like consumables and loose tools (screwdrivers,
hammers, etc.)
 For eg. Tissue paper and soap or hand wash

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FOR YOU REFERENCE
 Empty tin of raw material purchased like oils cannot be
considered as Inventory. It is immaterial whether such
tins are salable or not as neither it is held for sale in
ordinary course of business nor used in process of
production. These will be classified as other current
assets at NRV (net realizable value).
 Cost of land and development charges incurred by real
estate industry represents inventory as it is held for sale.
 Generally, spare parts and standby equipment are
classified as Fixed assets if it satisfy the definition of
Plant, property and equipment Ind AS-16 else it will be
treated as inventory. 3
CLARIFICATION
Ques.
Whether packing material and publicity material are
covered by the term ‘material and supplies awaiting use in
the production process’?
Answer:
Primary packing material may be include within the scope
of the term ‘material and supplies awaiting use in the
production process’.
Where,
Primary packing material which is essential to bring an
item of inventory to its saleable condition, for example, 4
bottle, cans etc., in case of food and beverages industry.
 Secondary packing material and publicity material
cannot be include, as these are selling cost which are
required to be excluded as per Ind AS 2.

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OBJECTIVE OF THIS STANDARD
 To prescribe the accounting treatment for inventory.
 A primary issue in accounting for inventory is:

The amount of cost to be recognized as an asset and carried

forward until the related revenues are recognized.
 This standard deals with:

a) Determination of cost and

b) Its subsequent recognition as an expense

c) Including any write-down to net realizable value.

d) It also provides guidance on the cost formulas that are used

to assign cost to inventories.
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IND AS 2 APPLIES TO ALL INVENTORY
EXCEPT:
 WIP under construction contract including directly related to
service contract (For this we have separate AS 7: Construction
Contracts and It's Disclosure).
 WIP in business for service providers Incomplete consultancy
services.
For ex. CA firm appointed from 1/2/2022 to 31/05/2022 and FY
end on 31st march every year.
 Financial Instruments held as a stock-in-trade (share,
debentures, bonds etc. Ind AS 32)
 Producer’s inventories like livestock, agricultural and forest
products, mineral oils, ores and gases. Such inventories are
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valued at net relisable value (NRV).
VALUATION BASICS

Stock in trade and • Always valued at cost

• If NRV is lower than cost, then valued at NRV
finished goods

• Always valued at cost

Work in progress • If NRV is lower than cost, then valued at NRV

• Value of raw material depends upon finished goods:

Raw Material • If FG at cost: Raw material valued at cost
• If FG at NRV: Raw material valued at replacement cost

• Valued at cost if customer is financially fit. 8

Customer specific • Valued at zero if customer is in liquidity crisis.
inventory
VALUATION BASICS

Valuation of empty • Empty bottles are inventory

bottles • Valuation is at nominal value i.e. Rs. 1 or Rs. 10

Valuation of Scrape • Valued at NRV and considered as income

Inventory under • Cost or forward price which ever is lower

forward contract

Inventory out of use • Valued at NRV 9

(non moving
Inventory)
NOTES
 Cost or NRV of each item shall be consider separately except
when inventory is similar or interchangeable.
 NRV is calculated if any of the following condition exists:

1. Physical damage

2. Slow moving inventory

3. Increasing cost of production

4. Decreasing selling price

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HOW DO YOU CALCULATE NET
REALIZABLE VALUE?

 Net realizable value (NRV) is a common method used to

evaluate an asset's value for inventory accounting. It is
found by determining the expected selling price of an
asset and all the costs associated with the eventual sale
of the asset, and then calculating the difference
between these two.
 To put it in formulaic terms:-

NRV = Expected selling price - Total production and selling

costs.
Eg. :- NRV for accounts receivable is calculated as the full
receivable balance less an allowance for doubtful
accounts, which is the dollar amount of invoices that the 11

company estimates to be bad debt.

MEASUREMENT OF INVENTORIES-
VALUATION PRINCIPLE OF INVENTORY
 Inventories shall be measured at the lower
of :
Cost
And
Net Realizable value
Cost of inventory include:
 Cost of purchase (net of trade discount)
 Cost of conversion
 Other cost 12
MEASUREMENT OF INVENTORIES-
VALUATION PRINCIPLE OF INVENTORY
Cost of purchase includes:-
 Purchase price (net of trade discount)
Add: Duties and taxes (if input tax credit and refund is not
available
Add: freight inward/Inward insurance cost (transit insurance)
Add: other expenditure directly attributable to the acquisition
(like toll charges)
Less: Volume discount and quality discount
Less: subsidies

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Cost of conversion includes :-
 Cost directly related to the units (i.e. Direct labour, direct expenses)
Add: systematic allocation of fixed and variable production
overheads incurred in converting material into finished goods.
Fixed production overheard : indirect cost of production that remains
relatively constant regardless of volume of production (e.g.
Depreciation and maintenance of factory building, cost of factory
management)
Variable Production overhead : indirect cost of production varies
directly or nearly directly with the actual volume of production (e.g.
indirect material, indirect labour)
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 Allocation of fixed overheads : on normal capacity
However in periods of abnormally high production, the amount of fixed
production overhead allocated to each unit of production on the basis of
actual production. Abnormally high production means actual production is
more than normal production.
 Allocation of Variable overheads : on actual production

In case of joint products : allocation on the basis of relative sales value of

product
In case of by-product : if the by-product, scrape or waste material are not
of material value they are measured at net realizable value. Then NRV is
deducted from cost of conversion. Net cost of conversion (e.g. cost of
conversion – NRV) is distributed among the main product. 15
Other costs:
 Cost incurred in bringing the inventories to their present
location and condition. E.g.
1. Quality control cost
2. R&D cost
3. Administration overheads related to production
4. Packaging cost
5. Cost of designing a product to meet the specific
requirement of a customer.

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EXCLUSIONS FROM COST OF
INVENTORIES
Following costs are excluded from cost of inventories :
 Abnormal amount of waste material, labour, other
production cost
 Carrying cost (storage cost)

 Administrative overheads (not related to production)

 Selling and distribution overheads

 Interest and borrowing cost

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CASE STUDY 1
A limited purchased 100000 MT of raw material and introduced it
in the production process and get 85000 MT as output. Normal
wastage is 5%.
In the process, company incurred the following expenses.
 Direct labour - Rs. 1000000

 Direct variable overheads - Rs. 100000

 Direct fixed overheards (including interest Rs. 40625) - Rs.

100000.
Of the above 80000MT was sold during the year and remaining
5000MT remained in closing inventory. Due to fall in demand in
market the selling price for the finished goods on the closing day
was estimated to be Rs. 105 MT. calculate the value of closing 18
stock.
CASE STUDY 2
 In a manufacturing process of Vijoy Ltd., one by-product
BP emerges besides two main products MP1 and MP2
apart from scrap. Details of cost of production process
are here under.
Item unit Amount Output (units) Closing
(Rs.) inventory
Raw material 15000 160000 MP1 - 6250 800
MP2 – 5000 200
BP - 1600 ----
Wages - 82000
Fixed overheads - 58000
Variable overheads - 40000
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CASE STUDY 2
 Average market price of MP1 and MP2 is Rs. 80 per unit
and Rs. 50 per unit respectively. By-product is sold @Rs
25 per unit. There is a profit on sale of by-product after
incurring separate processing charges of Rs. 4000 and
packing charges of Rs. 6000, Rs. 6000 was realized from
sale of scrape.
 Calculate the value of closing inventory of MP1 and
MP2

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CASE STUDY 3

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SOLUTION

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CASE STUDY 4
Vritant store is a departmental store, which sell goods on retail
basis. It makes a gross profit of 20% on sales. The following
figures for the year-ended are available:
Opening inventory Rs. 50000, Purchase Rs. 360000, Purchase
Return Rs. 10000, Freight inwards Rs. 10000, Gross sales Rs.
450000, Sales Return Rs. 11250, carriage outward Rs. 5000.
 Compute the cost of the inventory

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CASE STUDY 5

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SOLUTION

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 CASE STUDY 6
Particulars Quantity (in Kg.) Amount (in Rs.)

Opening Inventory Finished goods 1000 25000

Raw Material 1100 11000

Purchase 10000 100000
Labour 76500
Overheads (fixed) 75000
Sales 10000 280000
Closing Inventory Raw Material 900 ?
Finished goods 1200 ?

The expected production for the year was 15000 Kg. of the finished product. Due to fall in market demand
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the sale price for the finished goods was Rs. 20 per Kg. and the replacement cost for the material was 9.5
per Kg. on the closing day. You are required to calculate the closing Inventory as on that date.
CASE STUDY 7
The closing inventory at cost of company amounted to 284700.
The following items were included at cost in the total.
 400 coats, which had cost of Rs. 80 each and normally sold for
Rs. 150 each. Owing to a defect in manufacturing, they were all
sold after the balance sheet date at 50% of their normal price.
Selling expenses amounted to 5% of the proceeds.
 800 shirts which had a cost Rs. 20 each. These too were found
defective. Remedial work in April cost Rs. 5 per shirt and
selling expenses for the batch totaled Rs. 800. they were sold at
Rs. 28 each.
 What should be the inventory value be according to Ind AS-2
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after considering the above item?
CASE STUDY 8
(Ques.)
Raw material was purchased at Rs. 100/Kg. Price of raw material
is on the decline. The finished goods in which the raw material is
incorporated is expected to be sold at below cost. 10000 Kgs. of
raw material is on stock at the year end. Replacement cost is Rs.
80/Kg.
(Ans)
The stock of 10000 Kgs. Of raw material will be valued at Rs. 80
per Kg. the finished goods, if on stock should be valued at cost or
net realizable value whichever is lower.
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CASE STUDY 9
 Calculate the value of raw material and closing stock
based on the following information.
Particulars
Raw Material X
Closing Balance 500 Units
Rs. Per unit
Cost price including excise duty 200
Excise duty (CENVAT credit is receivable on the excise duty 10
paid)

Freight inward 20
Unloading charges 10 31

Replacement cost 150

Particulars

Finished goods Y

Closing Balance 1200 Units

Rs. Per unit

Material Consumed 220

Direct Labour 60

Direct overheads 40

Total fixed overheads for the year was Rs. 200000 on normal capacity of 20000 units
. 32
(I) NRV of the finished goods Y is Rs. 400.
(II) NRV of the finished goods Y is Rs. 300.
CASE STUDY 10