Valuation of inventories


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Valuation of inventories

  1. 1. Valuation of Inventories Importance of Inventories How much inventory to hold? Valuation of inventory Reporting
  2. 2. Valuation of Inventories AS – 2 Meaning and significance of Inventories Scope and coverage Principles and norms of standard accounting treatment:  Valuation policy  Cost of inventories  Cost formulas  Techniques for the measurement of cost  NRV Disclosure requirements
  3. 3. Meaning and significance Inventories are defined as 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. Finished goods, WIP, materials, maintenance supplies, consumables and loose tools. Machinery spares – AS 10
  4. 4. Scope and coverage AS 2 deals with all inventories except  WIP arising under construction contracts, including directly related service contracts (AS 7)  WIP 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 the extent that they are valued at NRV in accordance with well established practices in those inventories.
  5. 5. Principles and Norms Valuation policy  AS 2 - inventories are valued at lower of actual cost and NRV.  NRV – estimated selling price less the aggregate of estimated costs of completion of inventory and estimated costs necessary to make the sale.  Estimates of NRV are based on the most reliable evidence available at the time of making the estimates.
  6. 6. Principles and Norms Cost of Inventories – Costs of Purchase + Costs of conversion + other costs incurred in bringing the inventories to the present location and condition.  Cost of Purchase – final invoice value + carriage + duties and taxes – recoverable from the tax authorities - Cost of conversion – direct labor + fixed production overheads + variable production overheads
  7. 7. Principles and Norms- Allocation of OHs – allocated to conversion costs on the basis of normal capacity of production facilities- Joint and by-products – allocated between the products on a rational and consistent basis. (relative sales value).- If immaterial, waste / scrap / by-product – valued at NRV and deducted from the cost of the main product.
  8. 8. Principles and Norms- Other costs – costs of designing products for specific customers.- Interest and other borrowing costs- Exclusion of certain costs - Abnormal amt of waste materials, labor or other production costs - Storage costs, unless necessary for the next stage of production - Administrative OH that do not contribute to bringing the inventory to the present location and condition - Selling and distribution costs
  9. 9. Principles and Norms Cost formulas – cost flow assumptions  FIFO – assigns higher value  LIFO – assigns lowest value, relief during inflation  WAC – assigns lower value than FIFO Impact of the methods of valuation on COGS, GP and NP FIFO – highest inventory value, highest GP and NP
  10. 10. Principles and Norms Techniques for the measurement of cost  Actual cost method  Standard cost method  Retail method
  11. 11. Principles and Norms Net Realisable Value – writing down inventory below cost to NRV Circumstances justifying write-down to NRV – selling price declined, damage, wholly or partially obsolete, estimated cost have increased. Basis of write-down – item by item basis or similar or related groups basis
  12. 12. Principles and Norms Factors to be considered in estimating NRV  Fluctuations of price  Purpose for which the inventory is held Exception to write down – in case of decline in prices of materials held for use in production, if the finished products are expected to be sold at a higher price. Impact of NRV on valuation of inventory, COGS, GP and NP.
  13. 13. Disclosure requirements The accounting policies adopted in measuring and valuing inventories The cost formula used in valuation Total carrying amount of inventories and its classification appropriate to the enterprise.