As 02
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This document summarizes the key principles for valuing inventory according to Accounting Standard 2. Inventories should be valued at the lower of cost and net realizable value. Cost includes costs of purchase, conversion, and other costs to bring inventory to its present location and condition, but excludes abnormal wastage, storage costs unless necessary for production, and administrative and selling overheads. Net realizable value is estimated selling price less costs to complete and sell. Certain inventories like work in progress for construction contracts are excluded from this standard.
As 02
- 1. ACCOUNTING STANDARD -2 VALUATION OF INVENTORIES
- 2. PURPOSE Specifies the principals for valuing the inventory. Disclosure of the specific policies adopted by the management for the valuation of inventory.
- 3. SCOPE This statement should be applied in accounting for inventories other than : Work in progress arising under construction contracts, including directly related service contracts. Work in progress arising in the ordinary course of business of service providers. Shares, debentures and other financial instruments held as stock-in-trade; And. Producers’ inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to that extent that they are measured at net realisable value in accordance with well established practices in those industries.
- 4. RELEVANT DEFINITIONS Inventories are assets : held for sale in the ordinary course of business. in the process of production for such sale. in the form of materials or supplies to be consumed in the production process or in the rendering of services. Net Realisable Value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated cost necessary to make the sale.
- 5. VALUATION Inventories should be valued at the lower of Cost and Net Realisable Value . The Practice of writing down inventories below cost to Net Realisable Value is consistent with the view that assets should not be carried in excess of amounts expected to be realised from their sale or use.
- 6. COST OF INVENTORY The cost of inventories should comprise: Cost of purchase : includes: Duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities like MODVAT). Freight inwards and other expenditure directly attributable to the acquisition. Cost of conversion : includes: Labour Costs directly related to the production of finished goods Fixed and variable production overheads that are incurred in converting materials into finished goods. Other costs : included only to the extent they are incurred in bringing the inventories to their present location and condition.
- 7. EXCLUSIONS FROM THE COST Abnormal wastages of materials, labour or other production costs. Storage costs, unless they are necessary in the production process. Administrative overheads which do not contribute to bringing the inventories to their present location and condition. Selling and distribution overheads.
- 8. Cost formulas Following Cost formulas can be used: FIFO. Weighted average .
- 9. NET REALISABLE VALUE Inventories are written down to net realisable value on an item-by-item basis except where it is appropriate to group similar or related items. An assessment of net realisable value is made as at each balance sheet date. The valuation takes into consideration cost and selling price fluctuations directly relating to events occurring after the balance sheet date to the extent that such events confirm the conditions existing at the balance sheet date.
- 10. DISCLOSURE REQIREMENTS Accounting policies adopted in measuring inventories. Cost formula used. Total carrying amount of inventories. Classification of the above into raw materials and components, work in progress, finished goods, stores and spares, and loose tools.