Valuation of Inventories( AS-2)

Purpose: To formulate the method of valuation of inventories on hand for Balance Sheet purposes. Inventories include: 1) Finished goods held for sale in the ordinary course of business. 2) Raw material/WIP in the process of production of such sale. 3) Material and spares to be consumed for such production( does not include machinery) 4) Spares which are used in common with all fixed assets.

Valuation of Inventories( AS-2)

1)
2) 3) Does not include:WIP directly related to construction contract or service contracts. WIP of service providers. Financial instruments held as stock in trade. Producers inventories like livestock, mineral oil, ore, gas etc.

4)

Valuation of Inventories( AS-2)

Cost of inventory includes: 1) Cost of purchases.
a) Purchase price b) Duties and taxes c) Freight inward d) Other exp. Attributed to acquisition. Less: a) duties /taxes recoverable from govt. b) Trade discount ( c ) rebate d) Duty draw back e) other similar items.

Valuation of Inventories( AS-2)

Cost of Inventory includes:2) Cost of conversion1) Direct Labour/Material/expenses. 2) Fixed production overheads.( on normal capacity) 3) Variable production overheads.( on actual production) 4) In case of joint products- rational and consistent allocation 5) Scrap/by-product net realizable value deducted from costs.

Valuation of Inventories( AS-2)

Inclusion of excise duty in valuation of finished goods- as applicable on the balance sheet date. ( neutral effect) Care! Production for exports.

Valuation of Inventories( AS-2)

1) 2) 3) 4) 5) Exclusions from cost of inventories:Abnormal costs, wastage etc. Storage costs Administrative overheads S & D costs. Interest & borrowing costs.

Valuation of Inventories( AS-2)

Cost of inventories determined by:1) 2) 3) 4) Specific identification method. FIFO or weighted average cost. Standard cost. Retail Method( target cost)

Valuation of Inventories( AS-2)

Net Realisable Value (NRV) Is the estimated selling price less estimated cost of completion and estimated cost necessary to make the sale. Calculated on each Balance Sheet date.

Valuation of Inventories( AS-2)

Estimation of NRV:a) If finished product in which raw material and supplies used is sold at or above the cost , then estimated NRV of Raw material and supplies is shown at its cost. b) If finished goods in which raw material and supplies used is sold below the cost, then the estimated NRV of raw material and supplies is equal to replacement price of raw material and supplies.

Valuation of Inventories( AS-2)

MODVAT and now CENVAT (wef-1-4-2000):For Income Tax purpose:- Inventory costs include CENVAT paid on the item. For Balance Sheet purpose:- CENVAT amount debited to separate account as receivables.( AS-2)

AS-2-InventorySummary of key Points

Acctg. Policy to be used- FIFO/WAC Cost Formula to be used- Absorption Costing/ Standard costing/ Target costing Class of inventoriesFG/WIP/RM/Spares. In case of WIP- Net Realisable Vaue Abnormal wastage- DR. P &L account Normal Wastage- absorbed by prodn. Cenvat- Inclusive or exclusive method .

AS-2- Inventory
Value Raw material at Cost if the Selling price is more than the total cost of production of Finished Goods. If Selling Price is less than cost of production- value Raw Material at replacement Cost. If the difference between cost and Selling price of FG is 5% or less, only the difference can be reduced from Raw Material cost.