The document discusses inventory accounting and measurement under NAS 2. It defines inventories as raw materials, work-in-progress, and finished goods. Inventories are initially measured at cost, and subsequently at the lower of cost or net realizable value. Cost includes purchase price, conversion costs, and other costs to bring inventory to its present location and condition. Fixed production overheads are allocated to inventory based on normal capacity. The standard also discusses the treatment of abnormal costs, storage costs, and administrative overheads.
The document discusses inventory accounting and measurement under NAS 2. It defines inventories as raw materials, work-in-progress, and finished goods. Inventories are initially measured at cost, and subsequently at the lower of cost or net realizable value. Cost includes purchase price, conversion costs, and other costs to bring inventory to its present location and condition. Fixed production overheads are allocated to inventory based on normal capacity. The standard also discusses the treatment of abnormal costs, storage costs, and administrative overheads.
The document discusses inventory accounting and measurement under NAS 2. It defines inventories as raw materials, work-in-progress, and finished goods. Inventories are initially measured at cost, and subsequently at the lower of cost or net realizable value. Cost includes purchase price, conversion costs, and other costs to bring inventory to its present location and condition. Fixed production overheads are allocated to inventory based on normal capacity. The standard also discusses the treatment of abnormal costs, storage costs, and administrative overheads.
The document discusses inventory accounting and measurement under NAS 2. It defines inventories as raw materials, work-in-progress, and finished goods. Inventories are initially measured at cost, and subsequently at the lower of cost or net realizable value. Cost includes purchase price, conversion costs, and other costs to bring inventory to its present location and condition. Fixed production overheads are allocated to inventory based on normal capacity. The standard also discusses the treatment of abnormal costs, storage costs, and administrative overheads.
• held for sale in the ordinary course of business; [Finished Goods] • in the process of production for such sale; or [Work-in-process] • in the form of materials or supplies to be consumed in the production process or in the rendering of services. [Raw materials] Journal Entries for Inventory Particulars Debit (Rs.) Credit (Rs.) Purchase of inventory Inventory A/c --------------Dr. xxx To Cash/Bank/Payable A/c xxx
Sale of inventory Cash/Bank/Receivable A/c ---- ----Dr. xxx
Matching To Revenue [NFRS 15] xxx
Cost of Goods Sold (COGS) A/c ------------ Dr. xxx
To Inventory A/c xxx Scope
• NAS 2 applies to all inventories
except: • Financial Instruments (NAS 32 and NFRS 9) • Biological assets related to agricultural activity and agricultural produce at the point of harvest (NAS 41) Biological Assets (living plants or animals)
Related to agriculture Not related to agriculture
activity activity
Bearer plants – NAS 16 Agricultural Produce NAS 16
At the point of harvest –
NAS 41
After harvest – NAS 2
Agriculture Produce – NAS 41
Bearer Plant – NAS 16
Inventory – NAS 2 Measurement Lower of:
Cost Net Realisable Value
Cost of Purchase
Cost of Conversion
Other costs Cost [para 11-15] Cost of Purchase Cost of Conversion Other Costs Purchase price xxx Direct Labour xxx Other costs in bringing the Duties & Taxes xxx Variable Prodn OH xxx inventory to present location and (non-refundable) Fixed Prodn OH xxx condition Transport, Handling xxx Cost of Conversion xxx Other directly attributable costs xxx Less: Trade discounts/rebates xxx Cost of Purchase xxx Allocation of Fixed Production Overheads
The allocation of fixed production overheads to the costs of
conversion is based on the normal capacity of the production facilities.
Normal capacity is the production expected to be achieved on
average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance.
Unallocated overheads are recognised as an expense in the
period in which they are incurred Example Fixed Production Overheads Amount (Rs.) Depreciation of Factory Machine, Building xxx Rent of Factory Building xxx Salary of Production Manager xxx Total (for April) Rs. 10,00,000 ÷Normal Production 20,000 units Fixed OH/unit Rs.50/unit Fixed Production OH – Dr. 10,00,000 To Cash/Bank/Payable 10,00,000 Actual Production for April
18,000 units 20,000 units 25,000 units
Allocated to inventory Allocated to inventory Allocated to inventory = 18000 x Rs. 50 = 20,000 x Rs. 50 = 25000 x 50 = Rs. 12,50,000 (Actual exp > Allocated exp = Rs. 9,00,000 = Rs. 10,00,000 This cannot be the case)
1,00,000 = Rs. 10,00,000/25000 units = Rs. 40/unit
Allocated to inventory = 25000 x 40 = Rs. 10,00,000 Unallocated = 0 Fixed Production OH – Dr. 10,00,000 To Cash/Bank/Payable 10,00,000 Actual Production for April 18,000 units 20,000 units 25,000 units Inventory A/c – Dr. 9L Inventory A/c – Dr. 10L Inventory A/c – Dr. 10L SoPL A/c – Dr. 1L To F. OH 10L To F. OH 10L To F. OH 10L (Recovery rate = Rs. (Recovery rate = Rs. 40/unit) 50/unit) Actual Fixed Overhead incurred during the period Fixed Overhead = Recovery Rate Higher of (Normal or Actual Production units) A = Abnormal amounts of wasted materials, labour, or other production costs
S Excluded from = Storage costs unless those costs are necessary in the production process before a the cost of further production stage;
inventories A = Administrative Overhead that do not
contribute to bringing inventories to their present location and condition; and
S = Selling Costs Deferred Payment
• An entity may purchase inventories on deferred
settlement terms. When the arrangement effectively contains a financing element, that element, for example a difference between the purchase price for normal credit terms and the amount paid, is recognised as interest expense over the period of the financing.
• Interest recognized as per Effective Interest
Rate (EIR) method. Example
A Ltd. purchased goods with payment Rs. 1,21,000
being made at the end of 2nd year. The cash price of the goods as on today is Rs. 1,00,000. How shall A Ltd. record these transactions ? Solution Calculation of Effective Interest Rate (EIR) Present Value (PV) = Rs. 1,00,000 Future Value (FV) = Rs. 1,21,000 Rate of interest (r) = ? We have, FV = PV(1+r)n 121,000 = 100,000 (1+r)2 r = 10% (EIR) Amortisation Table Opening Interest @ EIR 10% Payment Closing Year (a) (b) (c) (a+b-c) 1 1,00,000 10,000 - 1,10,000 2 1,10,000 11,000 1,21,000 - Journal Entries (A Ltd.) Date Particulars L.F Debit (Rs.) Credit (Rs.) . Y-1 (begin) Inventory A/c ----------------------- Dr. 1,00,000
To Bank A/c 1,21,000 Net Realisable Value (NRV) Particulars Amount (Rs.) Estimated Selling Price in the ordinary course of xxx business Less: Estimated cost of completion xxx Less: Estimated cost to sell (e.g., agents' xxx commission) Net Realisable Value* xxx
*NRV shall be calculated on item-by-item basis.
Example Items Cost (Rs.) NRV (Rs.) Measure At Impairment Loss
A 80 84 80 (Cost) 0 B 75 70 70 (NRV) 5 C 90 88 88 (NRV) 2 Total 245 242 238 7 Measurement of Raw materials
• 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 a decline in the price of materials indicates that the cost of the finished products exceeds net realisable value, the materials are written down to net realizable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value. When there is decline in price of materials
Can the finished goods to be
produced from the materials be sold at or above cost ?
Yes No
Raw material will be
Raw material will valued at lower of: be valued at cost. - Cost - Replacement Cost Question (Dec 2018) Answer Exception of Measurement This Standard does not apply to the measurement of inventories held by: - producers of agricultural and forest products, agricultural produce after harvest, and - minerals and mineral products, to the extent that they are measured at net realisable value (not at lower of cost or NRV) in accordance with well-established practices in those industries. When such inventories are measured at net realisable value, changes in that value are recognised in profit or loss in the period of the change. - agricultural crops have been harvested, or - minerals have been extracted
Sale is assured under
Forward Contract
Government Guarantee
Active market exists and there is
negligible risk of failure to sell Question
Give your comments on the following:
Rum Pum Noodles, manufacturing noodles, has valued at the year end its closing stock of packed finished goods for which firm sales contracts have been received, at realizable value inclusive of profit and cash incentive. As at the year end, the ownership of the goods has not been transferred to the buyer. Reversal of Loss • A new assessment is made of net realisable value in each subsequent period. • When the circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in net realisable value because of changed economic circumstances, the amount of the write-down is reversed (ie the reversal is limited to the amount of the original write-down) so that the new carrying amount is the lower of the cost and the revised net realisable value. • This occurs, for example, when an item of inventory that is carried at net realisable value, because its selling price has declined, is still on hand in a subsequent period and its selling price has increased. Example Year 1 Year 2 Year 3 Cost =Rs. 100 Carrying amount = Rs. 90 Carrying amount = Rs. 94 NRV = Rs. 90 NRV = Rs. 94 NRV = Rs. 102 Measure at Rs. 90 Cost = Rs. 100 Cost = Rs. 100 Measure at Rs. 94 Measure at Rs. 100 (Increase by Rs. 4) (Increase by Rs. 6)
Impairment (SoPL) – Dr. 10 Inventory A/c – Dr. 4 Inventory A/c – Dr. 6
To Inventory 10 To Reversal of impairment(SoPL) 4 To Reversal of impairment 6 Cost Formula: An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified.
