Presented to: Binal maam

4/29/2012

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A Primary issue in-

Accounting for Inventories

is theDetermination of the valueat which inventories (As on)are carried in the financial statements until the -

related revenues are recognized .

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Inventories are valued at lower of cost and NRV. Cost of raw material is computed on a weighted

average method. Cost for Work in Progress includes raw material cost,cost of conversion,other costs incurred in bringing the inventories to their present location and condition. Cost for finished goods include material cost,cost of conversion ,other costs incurred in bringing goods to their present location and condition and Excise duty Cost of spares and stores are computed on a weighted average basis.
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 THE COST OF INVENTORIES SHOULD COMPRISE

ALL COSTS OF PURCHASE, COSTS OF CONVERSION AND OTHER COSTS INCURRED IN BRINGING THE INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION.

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Costs directly related to

production Their division in fixed and variable costs And their systematic allocation.

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 Labour costs

Stores and spares

Raw Material at Factory Repair and Maintenance

Royalty on Manufactured goods

Supervisory Staff at Factory Depreciation

Power and Fuel

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 FIFO Method
LIFO Method
Simple Average Method

Weighted Average Method Periodic or Moving Specific Cost Identification Method Retail Method Standard cost Method

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 FIFO Method

Weighted Average Method

Retail Method Standard Cost Methods

Specific Cost identification Methods

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Normal Capacity
The Production expected to be achieved on an average over a number of periods or seasons under normal circumstances ,taking into account loss of capacity resulting from planned maintenance.
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Standard Cost
A scientifically pre-determined cost which is arrived at assuming a particular level of efficiency in utilization of material, labour and indirect services.

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Replacement Cost
Cost of replacement in the open Market

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Net Realizable Value

Estimated Selling Price in ordinary course of Business Less estimated cost of Completion Less Estimated cost of completing the Sale

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 Normal Capacity=

Production expected to

be achieved Standard Cost= Scientifically Predetermined Cost Replacement Cost NRV= Market Price less Expenses

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ALLOCATION OF FIXED OVERHEADS

NORMAL CAPACITY Why w e us e Norm al Capacity for allocating Fixe d cos ts And w hy not actual production Fixed overheads Normal Capacity Cost Allocated /unit 100000 Rs 10000 units 10 Rs

Absorption w hen Production is Production 3000 units 6000 units 3000 units 12000 units Re as on: Idle Capacity Cost is charged to Prof it and Loss Account and not absorbed over the closing stock
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Available for Allocation to Stock 30000 60000 30000 100000

charge d to P& L 70000 40000 70000 0

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 FIFO
PERIODIC WEIGHTED AVERAGE MOVING WEIGHTED AVERAGE

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Simple Average Method Date Particulars Purchases Qty. Jan 1 Pur 5 Pur 200 100 2 2.2 400 220 620 WEIGHTED AVERAGE 1 Pur 5 Pur 200 100 300 2 2.2 400 220 620
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Issues Rate Value Qty.

Balance Av Rate Value

Rate

Value Qty.

200 300

2.00 2.10

400 630 630

200 300

2.00 2.07

400 620 620

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Periodical Weighted Average Method fortnighlty

Date Particulars ulars Qty. Jan 1 Pur 5 Pur 10 Pur 15 Purchases Rate Value 200 100 150 450 20 22 24 25 27 28 Pur Issue Pur Issue Issue Issue 120 120 2.50 2.50 2.00 2.20 2.40 400 220 360 980 300 50 2.18 108.9 300 50 2.18 109.0 100 2.18 218.0 350 2.18 763.0
690 1,580
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Issues Balance Qty. Rate Value Qty. Rate Value 200 300 450 450 570 520 640 590 490 140 2.18 2.18 2.18 2.18 2.18 2.18 2.18 2.29 400 620 980 980 1241 1132 1394 1285 1067 305

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Moving Weighted Average Method TRANSACTION WISE

Date Jan 1 5 10 20 22 24 25 24 27 28 Pur Pur Pur Pur Issue Pur Issue Pur Issue Issue 200 100 150 120 2.000 2.200 2.400 2.500 400 220 360 300 50 120 2.500 300 50 120 2.500 300 100 350 2.328 232.8 2.328 814.9
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Particulars Purchases Issues Balance ulars Qty. Rate ValueQty. Rate Value Qty. Rate Value 200 300 450 570 520 640 590 710 610 260 2.000 2.067 2.178 2.246 2.246 2.293 2.293 2.328 2.328 2.328 400 620 980 1280 1168 1468 1353 1653 1420 605
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2.246 112.3 2.293 114.7

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Standard cost sheet and its review

DBMS BOM To inculcate financial discipline

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EXCLUSIONS FROM COST OF INVENTORIES

Storage cost unless those costs are
necessary in the production process prior to a further production stage. **ABNORMAL COST ** Damaged Goods Obsolete Goods Non Moving Goods AND RELATED PROVISIONS?
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 Materials and Supplies held for use in production

are not written below cost if the finished product in which the material is Incorporated is expected to be sold at or above cost.(FG CP =25 AND NRV =26) If there is decline in prices of material and it is estimated that cost of finished product will exceed Net Realization value, the raw materials are written down to Net Realizable value. Replacement cost is the best available measure
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 The Accounting Policies adopted in measuring

inventories,including the cost formula used The total Carrying Amount of inventories and its classification into Raw Material,WIP,Finished Goods (Appropriate to the enterprise)

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www.nirc-icai.org/backgroundmaterial/a68.ppt

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