Accounting Standard: 2

Valuation of Inventories
Accounting Standard-2 deals with:
Determination of value at which inventories
are carried in B/S,
Ascertainment of cost (manner),
Situation in which carrying cost of inventories
is written below cost.
Inventories are assets:

held for sale in ordinary course of business,

in the process of production for such sale,or
in the form of material or supplies to be
consumed in the production process or in the
rendering of services.
Measurement: Inventories should be valued
at lower of Cost and Net realisable value.
Net Realisable Value =
Estimated selling price Estimated cost
necessary to make sale.
Cost of Inventories: These include all cost of
purchase, cost of conversion and other cost
incurred in bringing the inventories to their present
location and condition.
But does not include:
i) abnormal amount,
ii) storage cost unless necessary in the
production,
iii) administrative overhead,
iv) selling and distribution cost.
Cost of Purchase: Purchase price net of Trade discount,
Rebate, etc.
Cost of conversion: include cost directly related to unit of
production i.e. direct wages, variable overhead, allocable fixed
overhead.
Cost Formula: Valuation of inventories
depend on cost formula used by entity:
a) Specific identification method,
b) FIFO,
c) Weighted Average,
d) Standard Cost,
e) Retail Method (for retail trader).
 Application of formula: Cost formula is
applied in in item by item except one
situation.
Inventories are not written down below
cost if finished product of such inventory
are expected to be sold at above cost.
Disclosure:

Accounting policy adopted in measuring

including cost formula used,
Total carrying cost of inventories and its
classification.
THANKS.