Accounting for Inventories

AS-2 Valuation of Inventories

IAS-2 Inventories

INDAS-2 Inventories

Important Points are as follows

1. Matching Concept is the relevant concept for Inventories

2. Definition

Inventories Consists of the following

  • Held for sale in the ordinary course of business(finished goods)
  • In the process of production of such sale(raw material and work-in-progress)
  • In the form of materials or supplies to be consumed in production process or in the rendering of services (stores, spares, raw materials, consumables)

3. There is no major difference between IAS -2and INDAS-2.Only difference is in the Presentation of financial statements with respect to inventories

4. Differences between AS2 and IAS-2 and INDAS-2

As-2

IAS -2 and INDAS-2

1.Standard does not apply to the measurement of Inventories held by Commodity Broker –Traders who measure their Inventories at fair value less Costs to sell 1. No scope Exception for Inventories held by Commodity brokers
2.Inventories purchased on deferred settlement terms are not explicitly dealt With in the accounting standard on Inventories 2.Difference between the purchase price of Inventories for normal credit terms and the amount paid for deferred settlement terms is recognized as largest expense
3.Consistent Application of same Cost Formula is not required 3.Consistent Application of Same Cost Formula is recognized.
4.Reversal of Writ –down of Inventories is not recognized. 4.Write-down of inventories is recognized.

5. Measurement of Inventories

Valued at

Cost OR Net realizable value

whichever is less

6. Cost= Cost of Purchase +Cost of Conversion +Other Costs

A. Cost of Purchase =Purchase price-Trade Discount –Rebates +Duties and non-refundable taxes +Carriage inwards+ Frieght +GST+ Forwarding Charges for external transport +Transport Insurance+ Cost for a letter reference+Commission and brokerage paid+ Handling Costs+ Other expenditures directly attributable to the acquisition of finished goods, materials and services

B. Cost of conversion .

It includes

i. Direct Material

ii. Direct labour

iii. Direct expenses

iv. Fixed Production Overheads on normal capacity

v. Indirect material

vi. Indirect labour

vii. Other Variable Production Overheads

viii. Joint Product costs less net realizable value of by-products

ix. Normal wastage Cost of materials

x. Repairs and maintenance

C. Other costs.

Only if incurred in bringing inventories to present location and conditions

A detaied statement showing costs is as follows

Particulars Amount

 

. Direct Materials (Including Purchase Cost)

. Direct wages

. Direct Expenses

Prime Cost

Add: Factory Overhaeds

i. Fixed

ii. Variable

Works Cost

Add: Office and Administration Overhead(only a portion is required)

7. Exclusions from Cost of Inventories.

Following Costs are excluded from the cost of Inventories

1. Abnormal amounts of wasted materials, labour and other production cost.

2. Storage cost unless those costs are necessary in the production process before further stage

3. Administrative overheads

4. Selling and distribution Cost

8. Cost of Inventories of a service provider.

At the cost of their production.

9. Cost formula

a. Specific Identification method

b. Where Specific Identification method is not applicable

i. First in First Out(FIFO)

ii. Weighted Average Cost

c. Cost of Inventories in certain conditions

i. Standard Cost

ii. Retail Method

10.Net Realizable Value.

Estimated Selling Price

Less

Estimated Cost of Completion and estimated cost to make sale

11.Recognition

  • Expenses—-Carrying amount(When sold)
  • Write down to net realizable value—-Loss
  • Reversal of write down—reduction in expense.

12.Disclosures in the financial statement

The following statement should disclose the following

As an Asset

  • Classification of Inventories
  • Carrying Value
  • Cost formula

As an Expense

  • Amount recognized as an expense
  • Write down /reversal of write down
  • Inventories Pledged

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