STOCK VALUATION

Inventory means stock of the manufacturing or trading organisation. A

manufacturing concern holds stock in the form of raw materials, work-in-progress
and finished goods, whereas a trading concern holds stock in the form of finished
goods only.

AS-2 given by ICAI denotes Accounting Standard about ‘Valuation of Inventory’.

This accounting standard is applicable to all companies incorporated under
Companies Act-2013

Importance of Stock Valuation:

The cost of goods produced and sold by a manufacturing concern, and the cost of
goods purchased and sold by a trading concern directly depends upon the cost of
raw materials, work-in-progress and finished goods held as an inventory, by such a
business organisation. As a result of which ‘Gross Profit’ directly and ‘Net Profit’
indirectly of such business organisation depends upon cost of such inventory. It
means if the stock of raw materials, work-in-progress and finished goods are not
valued correctly and in an appropriate manner, then it affects the profitability.

Cost for Inventory Valuation

Cost of Includes
Raw Material Cost of Raw Material, Custom Duty, Transit Insurance,
Octroi Duty, Carriage, Loading-Unloading Charges
Finished Goods Cost of Raw Material, Custom Duty, Transit Insurance,
(Manufactured) Octroi Duty, Carriage, Loading-Unloading Charges, Factory
Direct Expenses such as Factory Wages, Factory Power &
Fuel, Factory Depreciation, Factory Rent, Factory
Supervisor’s Salary, Mould Expenses, Repairs, Insurance
Finished Goods Cost of Purchased Finished Goods, Custom Duty, Transit
(Purchased) Insurance, Octroi Duty, Carriage, Loading-Unloading
Charges

Periodic Inventory System

Normally a small manufacturing or trading concern maintains its inventory on

‘Periodic Inventory System’. It is a system of maintaining stock on periodic basis.
it means the stock is physically counted and valued after a certain period of time
like monthly, quarterly, half-yearly, yearly.

Perpetual Inventory System

Normally big manufacturing or trading concern maintains its inventory on

‘Perpetual Inventory System’. It is a system of maintaining stock on continuous
basis.

IBS Mumbai Accounting For Managers Page 1

Measurement of Inventory

Compare the Cost and Net Realisable Value (NRV), lower of the two is considered
as value of inventory.

Methods of Inventory (Stock) Valuation as per AS-2

Accounting Standard-2 as given by ICAI, recognises only two methods of inventory

valuation i.e. First In First Out (FIFO) Method and Weighted Average Cost (WAC)
Method. There is also one method called as Last In First Out (LIFO) Method though
not allowed by AS-2.

First In First Out (FIFO) Method

It means raw material purchased first are issued first for production, by the
manufacturing concern and finished goods purchased first are sold first, by the
trading concern.

Last In First Out (LIFO) Method

It means raw material purchased last are issued first for production, by the
manufacturing concern and finished goods purchased last are sold first, by the
trading concern.

Weighted Average Cost (WAC) Method

It is a method of inventory valuation where the inventory is valued at weighted

average cost (WAC) of the stock in hand. WAC is calculated at the time of every
purchase of raw material or finished goods, as the case may be. Then every
subsequent issue of raw material to production process and finished goods for sale
are made at such WAC rate of stock for the given units.

Weighted Average Cost rate per unit =

[(Value of Stock in hand) + (Cost of Purchase)]

[(Units Stock in hand)+(Units Purchased)]

IBS Mumbai Accounting For Managers Page 2

Problems:

1.

Ascertain the value of Closing Stock as on 31.03.2015 using (a) LIFO (b) FIFO and
(C) WAM

Date Purchases Sales Closing Stock

Units Rate Amount Units Rate Amount Units Rate Amount
31.12.2014 - - - - - - 1,500 20 30,000
16.01.2015 500 20 10,000 - - - - - -
21.01.2015 - - - 1,000 22 11,000 - - -
09.02.2015 5,750 21 36,750 - - - - - -
26.02.2015 - - - 1,250 23 28,750 - - -
03.03.2015 - - - 1,400 25 35,000 - - -
12.03.2015 3,500 24 84,000 2,800 27 75,600 - - -
22.03.2015 - - - 600 27 16,200 - - -

2.

Using (a) LIFO (b)FIFO and (C) WAM determine the value of Closing Stock as on
31.12.2014 when stock on hand was 2200 units@ Rs. 10 per unit

Date Purchases Sales

Units Rate Amount Units Rate Amount
02.01.2015 - - - 1700 12 20400
14.01.2015 1500 14 21000 - - -
29.01.2015 - - - 1800 15 27000
16.02.2015 1950 15 29250 - - -
23.02.2015 - - - 950 16 15200
14.03.2015 4500 17 76500 3200 18 57600
23.03.2015 - - - 500 18 9000

3.

ABC Ltd. Wants you to ascertain the value of its closing stock as on 31.12.2013
Using (a) LIFO (b)FIFO and (C) WAM as on 1.10.2013 when stock on hand was
22000 units@ Rs. 11 per unit.

Date Purchases Sales

Units Rate Units Rate
27.10.2013 15000 13.00 -- --
01.11.2013 -- -- 33000 14.00
13.11.2013 21000 15.00 -- --
18.11.2013 -- -- 20500 16.00
22.11.2013 23000 15.00 -- --
14.12.2013 -- -- 14900 17.00
24.12.2013 19000 16.00 -- --

IBS Mumbai Accounting For Managers Page 3