Practical Questions on Accounting Standard 2 : Valuation of Inventory
1.
The company deals in three
products, A, B and C, which are neither similar nor interchangeable. At the
time of closing of its account for the year 2002-03. The Historical Cost and
Net Realizable Value of the items of closing stock are determined as follows:
What will
be the value of Closing Stock?
Answer:
As per para 5 of AS 2 on Valuation of Inventories, inventories should be
valued at the lower of cost and net realizable value. Inventories should be
written down to net realizable value on an item-by-item basis in the given
case.
Hence,
closing stock will be valued at Rs. 76 lakhs.
2.
X Co. Limited purchased goods at
the cost of Rs.40 lakhs in October, 2005. Till March, 2006, 75% of the stocks
were sold. The company wants to disclose closing stock at Rs.10 lakhs. The
expected sale value is Rs.11 lakhs and a commission at 10% on sale is payable
to the agent. Advise, what is the correct closing stock to be disclosed as at
31.3.2006.
Answer:
As per Para 5 of Accounting Standard 2 “Valuation of Inventories”, the inventories are to
be valued at lower of cost and net realizable value.
In this case, the cost of inventory is Rs. 10 lakhs. The net realizable
value is 11,00,000 × 90% = Rs. 9,90,000. So, the stock should be valued at Rs.
9,90,000.
3.
Items that are to be excluded in determination of
the cost of inventories as per AS2.
Answer:
Items that are to be excluded in determination of the cost of
inventories as per para 13 of AS 2 on ‘Valuation of Inventories’ are:
·
Abnormal amounts of wasted materials, labour or
other production costs.
·
Storage costs unless those costs are necessary in
the production process prior to a further
·
Administrative overheads that do
not contribute to bringing the inventories to their present location and
condition; and
·
Selling and distribution costs.
4.
Sony Pharma ordered 12,000 kg. of
certain material at Rs.80 per unit. The purchase price includes excise duty Rs.
4 per kg in respect of which full CENVAT credit is admissible. Freight incurred
amounted to Rs. 77,400. Normal transit loss is 3%. The company actually
received 11,600 kg. and consumed 10,100 kg. of material. Compute cost of
inventory under AS 2 and abnormal loss.
Answer:
Value of closing stock under AS 2 = (11,600 kgs. – 10,100 kgs.) × Rs. 85
= Rs.1, 27,500 Abnormal loss = (11,640 kgs. – 11,600 kgs.) × Rs.85 = Rs.3,400
5.
Raw materials inventory of a
company includes certain material purchased at Rs.100 per kg. The price of the
material is on decline and replacement cost of the inventory at the year end is
Rs.75 per kg. It is possible to convert the material into finished product at
conversion cost of Rs.125. Decide whether to make the product or not to make
the product, if selling price is
(i) Rs.175
and
(ii) Rs.225
*Also find out the value of inventory in each case.
Answer:
As per para 24 of Accounting Standard 2 ‘Valuation of Inventories’,
materials and other supplies held for use in the production of inventories are
not written down below cost if the finished products in which they will be
incorporated are expected to be sold at or above cost. However, when there has
been a decline in the price of materials and it is estimated that the cost of
the finished products will exceed net realizable value, the materials are written
down to net realisable value. In such circumstances, the replacement cost of
the materials may be the best available measure of their net realizable value.
i.
When selling price is Rs.175
Incremental Profit = Rs.175 – Rs.125
|
= Rs.50
|
Therefore, it is better not to make the product.
Raw material inventory would be valued at net realisable value i.e. Rs. 75
because the selling price of the finished product is less than Rs.225 (100+125)
per kg.
ii.
When selling price is Rs.225
Incremental
Profit = Rs.225 – Rs.125 = Rs.100
Current
price of the raw material = Rs.75.
Therefore,
it is better to make the product.
Raw material inventory would be valued at Rs.100 per kg because the
selling price of the finished product is not less than Rs.225.
6.
HP is a leading distributor of petrol. A detail
inventory of petrol in hand is taken when
the books are closed at the end of each month. At the end of month
following information is available:
Sales
|
Rs.
|
47,25,000
|
General
overheads cost
|
Rs.
|
1,25,000
|
Inventory
at beginning
|
1,00,000 litres @ 15 per litre
|
|
Purchases
|
June 1
two lakh litres @ 14.25
June 30
one lakh litres @ 15.15
Closing
inventory 1.30 lakh litres
Compute
the following by the FIFO as per AS 2:
i.
Value of Inventory on June, 30.
ii.
Amount of cost of goods sold for June.
iii.
Profit/Loss for the month of June.
Answer :
| (i)
Cost of closing inventory for 1,30,000 litres as on 30th |
||||||
June
|
15,15,000
|
|||||
1,00,000 litres @ Rs.15.15
|
4,27,500
|
|||||
30,000 litres @ Rs. 14.25
|
19,42,500
|
|||||
Total
|
||||||
(ii) Calculation of cost of goods sold
|
15,00,000
|
|||||
Opening inventories (1,00,000 litres @ Rs. 15)
|
28,50,000
|
|||||
Purchases
|
June-1 (2,00,000 litres @ Rs.14.25)
|
15,15,000
|
||||
June-30
(1,00,000 litres @ Rs.15.15)
|
58,65,000
|
|||||
(19,42,500)
|
||||||
Less: Closing inventories
|
39,22,500
|
|||||
Cost of
goods sold
|
||||||
(iii) Calculation of profit
|
47,25,000
|
|||||
Sales
(Given) (A)
|
39,22,500
|
|||||
Cost of goods sold
|
1,25,000
|
|||||
Add: General overheads
|
40,47,500
|
|||||
Total cost (B)
|
6,77,500
|
|||||
Profit
(A-B)
|
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