Basis of Inventory Valuation - Material Cost, Cost Accounting Video Lecture | Cost Accounting - B Com

now we come to the basis of inventory
valuation
how should inventory be valued
should it be valued at cost that is the
price at which we buy boy at NRV net
realizable value which is the price we
may expect to set
cost is the purchase cost and we will
consider all the details of the elements
or components of what makeup purchase
cost in detail in the next slide but
what is NRV or net realizable value it
is the value that we can realize by
selling a commodity
however we talk of net realizable value
which means if we have some inventory on
which some work needs to be done some
costs have to be encouraged to complete
the particular item also in order to
make the sales we may have to incur some
expenses both these costs would have to
be reduced from the selling price to
arrive at net realizable value let us
take a simple example suppose we have
the selling price of the particular
stock in hand is rupees 20 however this
particular item is not complete there is
some finishing work on it to be done
this finishing work would involve a cost
of rupee one value of it also in order
to sell we need to pay a commission of
rupees 2 per unit there in that case the
net realizable value of this particular
product would be 20 the price which we
will get less 1 the price to complete
the product the cost of completion of
the product less 2 being the cost to
sell the product giving as rupees 70
therefore net realizable value
is the price that we will get to sell
the product when we sell the product
less any costs of completion and any
other costs incurred which we would have
to incur if we sell the product now a
question was a basic question was
whether we would value the inventory at
cost or net realizable value we were
evaluated cost of net realizable value
whichever is lower so it is going to be
lower of cost or an RV this is in
accordance with the concept of
conservatism the concept of conservatism
says that if we anticipate any losses if
we expect any losses in future we should
make a provision for it immediately we
should make a provision for it now
however if we expect to make a profit in
the future
we cannot recognize these profits unless
the profit is actually realized unless
the sale is actually made in this
particular example where we had got an N
RV of rupees 70 suppose the cost of
making this product is rupees 20 when we
value this commodity at rupees 70 we are
valuing closing stock at a lower price
and therefore bringing down our profits
this is because this item which cost us
20 rupees to make or buy to procure can
be
only for rupees 70 and therefore we
expect to make a loss of rupees 3 future
following the concept of conservatism
being prudent we will therefore value of
closing stock only at will be 70 and not
a trapeze 20 on the other hand if the
net realizable value was 25 we would
value it only at a cost price of 20
because though we expect to get 25 when
we sell the commodity we have not yet
sold sales has not yet been made profits
have not yet been realized we cannot
anticipate this profit and bring it into
the books in such a situation where cost
is 20 an army is 25 we would value the
goods at a cost of rupees 20 thus basis
of inventory valuation is either cost or
net realizable value whichever is lower
in accordance with the concept of
conservatism the principle of prudence