Valuation of Inventories - Verification and Valuation of Assets and Liabilities, Auditing and Secret Video Lecture | Auditing and Secretarial Practice - B Com

let us study the second accounting
standard which is titled as valuation of
inventories this accounting standard is
created with the following two
objectives one to provide a guidance for
determining the value at which
inventories are to be valued in the
financial statements unbilled related
revenues are earned to provide guidance
on the cost formula that are used to
assign cost to inventories the standard
applies to all inventories except the
below given items since separate
standards have been individually
assigned for its implementation a work
in progress under construction contracts
be work in progress in the ordinary
course of business of service providers
see financial instruments as token
trades D livestock agricultural and
forest products all other inventories
are valued and presented in the
financial statements according to the
principles listed under accounting
standard - we have understood that a is
- deals with evaluation and presentation
of inventories in the financial
statements first of all what are
inventories as2 defines inventories as a
assets held for sale in the ordinary
course of business this means finished
goods be assets used in the process of
production for such sale these are
termed as work-in-progress C assets in
the form of materials or supplies to be
consumed in the production process or in
the rendering of service these are
termed as raw materials since we have
learned what inventories are it might be
easy for us to think of various
inventories in different industries for
example in a car manufacturing company
automobiles are the inventories since
they manufacture and sell it in the
ordinary course of business for a
textile shop Clos
Coates and Mark garments would be the
inventory for a vegetable shop
vegetables are its inventories in a
manufacturing company the raw materials
used for the production and goods
processed halfway can also be called as
inventories inventories remain as one of
the major financial areas in most of the
enterprises and hence clear instructions
has to be given pertaining to its
valuation and presentation this would
result in uniform and identical
treatments of inventory in the
financials this enhances comparability
and uniformity so how should inventories
be valued in the books of accounts the
standard instructs us to value
inventories at the lower of its cost and
net realizable value what then is the
cost of inventory for finished goods
cost as a summation of cost of purchase
of its raw material cost incurred to
convert those raw materials into
finished goods and other cost necessary
to bring the inventory in present
location and condition for
work-in-progress it is a summation of
cost of purchase and cost of conversion
for raw materials its cost is the cost
incurred for purchasing the raw material
net realizable value is the total amount
receivable on selling the inventory less
other selling expenses it is easily
understandable that net realizable value
can be estimated only for finished goods
and not for work-in-progress and raw
materials since they cannot be normally
sold in the market hence generally lower
of cost and net realizable value applies
to finish goods inventory alone
work-in-progress and raw materials are
usually valued at cost however if the
net realizable value of the relevant
finished goods is lower than the cost
the relevant raw materials and
work-in-progress should be returned down
to net realizable value in such
circumstances the replacement cost
of the materials maybe the best
available measure of their net
realizable value replacement causes a
cost to be incurred to replace the
assets at the same or equal value we
have learned that cost or net realizable
value whichever is lower applies only to
finished goods since raw materials and
work-in-progress is generally not
saleable let us now see how to find the
cost of finished goods cost has three
elements cost of purchase cost of
conversion and other cost cost of
purchase includes the purchase price
plus all other necessary expenses
directly attributable to purchase of
inventory like taxes and duties carriage
in word loading or unloading charges
less any expenses recoverable from the
supplier or government for a trading
company cost of finished goods is just
the cost of purchase
as mentioned before however for a
manufacturing concern cost of inventory
includes cost of conversion cost of
conversion is a sum total of direct
labor factory variable overhead and
factory fixing overhead direct labor is
the cost of workers who are directly
associated with the production process
the sum of direct materials cost and
direct labor cost is termed as Prime
cost overheads
are indirect expenses related to the
production of goods the two types of
overhead are variable overheads and fix
it overhead variable overhead are those
indirect expenses with changes in
proportion to the production
examples include electricity indirect
materials indirect labor etc indirect
materials are those materials which are
either not an integral component of
goods or have a very small physical
association with the main product
example oil lubricants used in the
running of machinery light bulbs used in
manufacturing machine
in direct labour is the cost of
employees who are not directly linked
with the production of goods
examples include wages of custodians
supervisors electrical maintenance
employees etc the second type of
overhead is fixed overhead which are the
types of cost which remains same
irrespective of the production or sales
of the company examples are insurance
premium fixed salaries rent of the
factory premises etc the third factor in
the total cost is other miscellaneous
cost which are incurred to bring the
goods to present condition this includes
packing charges logo printing charges
etc hence the total cost of a product
manufactured is direct materials plus
direct labor plus variable factory
overhead plus fixed factory overhead
plus other miscellaneous charges however
there are some cost which are explicitly
excluded from the cost of inventory
these include selling and distribution
cost storage cost unless those cost are
necessary in the production process
prior to a further production stage
administration overheads which do not
contribute to bringing the inventories
to their present location abnormal
wastage of materials labor or other
production cost borrowing costs that are
directly attributable to the acquisition
construction or production of a
qualifying asset are included in the
cost of the qualifying asset qualifying
assets are those inventories that
necessarily takes a substantial period
of time to bring them to salable
condition examples of qualifying as it
includes a power plant which will take a
substantial period of time to get ready
to generate electricity a toll bridge
which can take a couple of years to
construct before it can be opened for
the public to use a hydroelectric dam
that takes several years to construct
sometimes a single production process
may result in one or more products in
case this additional product is intended
item and has a good market value they
are known as joined products if this
additional product doesn't have a good
market value then they are considered as
byproducts in case of joined products
total cost incurred for producing the
joint product is allocated among them
using some rationale like ratio of sale
value of those products in the closing
stock however in case of buy products
the net realizable value of these
byproducts is reduced from the total
cost so as to arrive at cost
of the main product we have learned
before that inventories are valued at
lower of cost and net realizable value
we have been looking into the ways of
finding cost per unit of the inventory
now let us see the method of finding the
total cost of inventories using the cost
per unit for example assume that we are
a manufacturing company and hence
produced a batch of 10,000 units of
finished goods with a cost per unit
rupees 10 next day we continue the
production and then produced another
10,000 units of finished goods at rupees
levan per unit since the cost of
materials had risen then we sold 7,000
units of finished goods to a party on
the third day what would be the cost of
our inventory then is it one lakh forty
thousand or one lakh forty three
thousand or some other number to know it
exactly the standard has prescribed
certain cost formula which has to be
opted by every company in the valuation
of its inventory
these are FIFO LIFO weighted average
cost specific identification method
standard cost and retail method these
are the various options available to the
entities to be chosen for valuing their
inventory's let us now see what each one
of them stands for first-in first-out
abbreviated as FIFO is a method under
which whatever is received first is
issued first hence closing inventory is
valued at the rates for the equivalent
units purchased at the last lastin
first-out
is a method under which whatever is
received at last is issued first hence
closing inventory is valued at the rates
for the equivalent units purchased at
the beginning weighted average is a
method of inventory valuation where cost
per unit is assessed by dividing the
total cost of production or purchased by
the total number of units specific
identification method this is a method
of inventory valuation which is suitable
where one unit of inventory is not
interchangeable with another unit each
unit is valued specifically on its
original cost examples for such goods
are shipbuilding missionary building etc
there are two more cost formulae or
techniques of measurement of cost
suggested by the accounting standard for
some special cases these are standard
cost method and retail method under
standard cost method inventories are
valued on the basis of cell standards
which are realistic and reviewed
regularly in retail method inventories
are valued at the selling price which is
then adjusted with a normal gross profit
ratio and selling expenses to reach at
its cost till now we have seen the
methods used to arrive at the cost of
inventory the second part of the
question is the value called net
realizable value how can it be found net
realizable value is the estimated
selling price in the ordinary course of
business less the core
necessary to make the sale that is
selling expenses for example ABC limited
has manufactured goods worth rupees 100
the current market value of these goods
are rupees 130 in order to sell these
products a broker has to be engaged by
paying him rupees 5 and rupees 10 to
deliver the product to customer in this
case the net realizable value is equal
to 130 minus 5 minus 10 which is rupees
115 hence in this case the product will
be valued at lower of cost and net
realizable value which is the lower of
rupees 100 or 115 and hence the value of
inventory will be rupees 100 what
exactly has to be disclosed in the
financial statements pertaining to
inventory the following has to be
disclosed first the accounting policies
adopted in measuring inventories which
is the lower of cost and net realizable
value to cost formula used and three
total carrying amount of inventories
together with a classification
appropriate to the enterprise the
inventory should be classified in the
below categories a raw material B
work-in-progress C finished goods D
stores and space e loose tools let us
now do a couple of problems so as to get
a firm grip on the concepts we learnt
till now evening limited is engaged in
the manufacture of ice creams during the
year 2014-15 company ordered 16000
kilogram of a material named a at rupees
160 per kilogram thousand kilogram of B
add rupees 20 per kilogram 500 kilograms
of C a trapeze 30 per kilogram all these
prices includes excess duty of rupees 5
per kilogram in respect of which full
sandman credit is
visible the normal transit loss is two
percentage the company actually received
fifteen thousand five hundred kilogram
of a and consumed thirteen thousand six
hundred kilogram of it 970 kilograms of
B and consumed the whole and for a
defect low grams of C and consumed the
whole amount the other details of cost
of production are as under wages Ruby 60
lakh forty thousand variable overhead
rupees 8 lakh fixed at overhead rupees
11 lakh sixty thousand which includes
interest charges of rupees fifty five
thousand and lastly selling overhead of
rupees ninety five thousand the
production resulted in formation of
three products which are named P one
lakh twenty five thousand kilograms Q 1
lakh kilograms and a byproduct
thirty-two thousand kilogram currently
the market price per kilogram of P Q and
the byproduct are 80 50 and 25
respectively at the end of the year
product P left unsold is sixteen
thousand kilograms and product Q left
unsold is 4,000 kilograms there is a
profit of rupees ninety thousand on sale
of by-product after incurring separate
processing charges of rupees eighty
thousand and special packing charges of
rupees one lakh twenty thousand rupees
sixty thousand was realized from the
sale of scrap along with the
manufacturer evening limited sells ice
cream in the shops they run evening
limited purchases the glass cups for say
serving ice creams to its customers
while leaving the shops the consumers
leave the empty cups in the shops and
the company takes position of these
empty cups company has laid down a
detailed internal record procedure for
accounting for these empty cups which
are sold later by the company calling
for tenders can we consider the empty
cups existing as
the date of balance sheet as inventories
of the company and hence to be valued as
per ASTM e treated as scrap and hence
shown at realizable value with
corresponding credit to other income
also compute the value of closing
inventory as on 31st March 2015
are there any abnormal losses incurred
during the transactions if yes how much
is the loss and what is the accounting
treatment for it the closing stock in
evening limited includes the following
raw material a 1900 Clos grams product P
16 thousand kilograms product Q four
thousand kilograms my products are those
products which doesn't have good market
value and hence they are normally sold
at a lower amount in the market this
amount is generally deducted from the
total cost of production firstly let us
find the cost of raw material which are
yet to be consumed and hence in the
stock in this case it is raw material a
cost of raw materials includes the cost
of its purchase and any freight or
unloading charges incurred for its
purchase in our question only the cost
of raw materials alone is given however
this amount includes excise duty paid
which can be claimed back as sin worth
credit hence this amount needn't be
included in the cost of materials let us
now see how to find out the actual cost
per unit of each raw material by giving
effect of sin VAT credit name of the
material ABC materials bought in claw
grams 16,000 thousands and 500 cost of
purchasing per kilogram 160 20 and 30
total cost of purchase of each material
25 lakhs sixty thousand twenty thousand
and fifteen thousand less excess Duty
which can be claimed as sin rad credit
that is rupees five per each kilograms
which is 80 thousand five thousand and
two thousand five hundred next we shall
find the amount of material often
normal loss which is 98 percentage of
the total materials bought for each raw
material since the two percentage of the
materials ordered are lost during
transit
hence the figures would be fifteen
thousand six hundred and eighty nine
eighty and for 90 kilograms we assume
that the total cost found before is
actually for raw materials received
after the transit loss hence we will now
find the revised cost per kilo gram of
these raw materials which is obtained by
dividing total cost of material obtained
by Lessing the sin well credit by
kilograms of material obtained after
normal loss this turns out to be rupees
158 point one six rupees fifteen point
three one and rupees twenty five point
five one amount of material received for
a B and C are fifteen thousand five
hundred 970 and 485 the amount of
materials consumed from the total is
thirteen thousand six hundred 970 and
485 respectively for materials B and C
the entire amount of materials received
are used up and hence there are no
closing stock for the same closing stock
of air turns out to be one thousand nine
hundred kilograms value of this closing
stock is 1,900 into 150 eight point one
six which is rupees three lakh 510 along
with the same let us also find the
abnormal loss in transit that means the
loss of material in excess of the normal
loss normal transit loss was given in
the question as to percentage hence any
loss exceeding this two percentage is
abnormal and hence the same has to be
written written off through the P&L
account this figure is obtained by
reducing the materials received from
amount of materials after normal loss
which turns out to be one hundred and
eighty ten and five kilograms for a B
and C respectively
monetary value of the abnormal loss is
the product of abnormal loss in
kilograms into a revised cost per kilo
grams which is two eight four six nine
point three nine one fifty three point
zero six and one twenty seven point five
five now let us see how to find the cost
of producing each of the main product P
and Q previously we have seen that net
realizable value of any by-product in
the manufacture has to be directed from
the cost of production of the main
products this is done with the notion
that by-product has very less market
value and hence we rarely use the same
for anything else also cost of
production of joint products is
allocated among the individual products
based on some rational basis example
this might be based on the ratio of
sales value of each of those product let
us see how much is the net realizable
value of the by-product which has to be
directed from cost of production of the
main products sales price of the
by-product is thirty-two thousand Clos
grams into rupees 25 which is rupees 8
lakh certain processing charge and
packing charges are incurred to sell
this by-product amounting to rupees
eighty thousand and rupees one lakh
twenty thousand hence the realizable
value of by-product turns out to be
rupees six lakh having obtained the net
realizable value of the byproduct let us
now see the cost of producing the main
products P and Q first we will add all
the elementary cost which includes
material wages variable overhead and
fixed overhead materials consumed has to
be valued at the revised cost per
kilogram we found in the previous
calculation also fix it overhead
excluding the interest is added since we
assume that the interest expenses
mentioned here are not for qualifying
assets
hence the results turns out to be rupees
fifty seven lakh twenty three thousand
two hundred and forty net realizable
value of the byproduct which we found
before has to be deducted we
ruby's six lakh and also the sale of
scrap amounted to rupees 60,000 the
total cost of production is rupees fifty
lakh sixty three thousand two hundred
and forty this is the joint cost of
producing both main products P and Q
cost of production separately for P and
Q cannot be found easily since not much
details are given for the same next
let's see how to allocate the cost
between the products P and Q the idea
followed is to allocate the total cost
among the main products in the ratio of
the total sales value output in clogged
rams is one lakh twenty five thousand
and one lakh for main products P and Q
respectively market value of them as
given in the question is rupees eighty
and fifty total sales value of P is one
crore and that of Q is fifty lakhs
ratio between these values is 2 is to 1
hence the total cost allocated to both
the products is fifty thousand sixty
three thousand two hundred and fourteen
the two by three and fifty thousand
sixty three thousand two hundred and
forty into 1 by 3 which is thirty three
lakh 75 thousand four hundred and ninety
three point two zero and rupees sixteen
lakh eighty-seven thousand seven hundred
and forty six point six zero this total
cost is divided between the total output
which gives cost per unit for P as
rupees twenty seven and Q as rupees
sixteen point eight eight from the above
calculations let us see what is the
value of closing inventory of main
products closing inventory in kilograms
for P and Q are sixteen thousand and
four thousand respectively cost per unit
is twenty seven and sixteen point eight
eight hence the value of the producing
stock is rupees for four lakh 30 2006
three point one three and sixty seven
thousand five hundred and nine point
eight six coming to the other part of
the question as to whether the empty
can be construed as inventory let's see
tangible objects or intangible rights
carrying probable future benefits owned
by an enterprise are called assets
evening limited sells these cups by
calling tenders it means further
benefits are accrued on its sale
therefore the empty glass cups are
assets for the company as per a is to
valuation of inventories inventories are
assets held for sale in the ordinary
course of business evening limited
maintains are detailed and controlled
recording this signifies its materiality
hence inventory of empty cups cannot be
considered as crap and should be valued
as inventory in accordance with a is -
let us now see another problem with
which we cover almost 100 percentage of
the chapter below are given certain
information about the raw materials and
finished a Goods of ABC Limited ABC
Limited maintains inventory in periodic
inventory method and values it in
weighted average basis details of
purchase of the raw materials are given
along with the date of purchase details
of issue of raw materials is also given
with the respective dates of issue
replacement cost of the raw materials is
also given which is rupees 150 certain
details about the finished goods are
also given in the question this includes
the closing stock as 1200 units
materials consumed 220 direct labor 60
direct overhead 40 and fixed overhead
rupees 2 lakh on normal capacity of 1020
thousand units based on the data given
above calculate the value of closing
stock when the net realizable value of
the finished goods are rupees 400 and
rupees 300 first let us determine the
amount of closing stock at the end of
the period for that let us make a table
detailing the date of transaction
purchase quantity sales quantity and the
in closing stock first date is first
March 2016 on which a purchase was
recorded
hence the closing stock at the end of
first March 2016 becomes 23rd March 2016
records the sale of ten quantities and
hence the closing stock becomes ten at
the end of third March 2016 similarly we
can fill up the remaining transactions
the final closing stock after all those
transaction turns out to be twenty we
are told that the company maintains
goods on the weighted average basis
hence the cost of each unit of the
closing stock is found by adding total
cost of purchase and dividing it by
total number of purchase in unit this
can be found using two additional
columns purchase cost per unit and total
cost of purchase
you
the total cost of purchase turns out to
be rupees eight thousand six hundred and
forty and dividing this amount by the
total units purchased gives us rupees
one hundred and eight this is the cost
per unit of the closing stock in order
to finalize the value of closing stock
of raw materials we need to determine
the value of finished goods two if the
net realizable value of finished goods
is lesser than the cost of finished
goods it's illogical to value the raw
materials which are used to make
finished goods at cost value in such a
case raw materials has to be valued at
the replacement cost so let us now
understand the cost of finished goods
materials consumed is rupees 220 direct
labor sixty direct overhead forty and
fix it overhead ten this gives us a
total cost of rupees three hundred and
thirty let us now summarize the cost and
net realizable value we have cost per
unit of raw materials as per the
weighted average is rupees one hundred
and eight net realizable value per unit
of the raw materials which is given in
the question is one hundred and seven
point seven five cost of the finished
goods is three hundred and thirty and
net realizable value per unit of the
finished goods is four hundred since
cost of finished goods is less than its
net realizable value raw materials are
valued at the lower of its cost and net
realizable value whichever is lower
value of raw materials is twenty units
into one hundred and seven point seven
five value of finished goods is three
hundred and thirty into 1200 now for the
second question cost per unit of raw
materials as per the weighted average
rupees one hundred and eight net
realizable value per unit of raw
material 107 point seven five cost of
the finished goods three hundred and
thirty and net realizable value per unit
of finished goods given in the question
is three hundred in this case
realizable value of Finnish toggles is
lesser than its cost
hence raw materials has to be valued at
replacement cost which is rupees 150
hence the value of raw material is 20
into 150 which turns out to be rupees
3000 and the value of finished goods is
300 into 1200 witches rupees 3 lakh
60,000 with this we have completed the
chapter on as2 valuation of inventories