Valuation of Inventories
This query is : Resolved
16 May 2010
Sirs,
I was asked a question during an interview which is as under:
Your company is manufacuturing two types of chemicals Say A & B, the item A is a raw material for item B. The cost of item A is Rs.20/ Ltr as per AS-2. Now, if the management decides to Value the item A for Rs. 25/ltr. What should be the accounting treatment and why.
Please help me out
I was asked a question during an interview which is as under:
Your company is manufacuturing two types of chemicals Say A & B, the item A is a raw material for item B. The cost of item A is Rs.20/ Ltr as per AS-2. Now, if the management decides to Value the item A for Rs. 25/ltr. What should be the accounting treatment and why.
Please help me out
16 May 2010
Joint Cost: As per CAS 1 Joint cost are defined as common cost of facilities or services employed in the output of two or more simultaneously produced or otherwise closely related operations, commodities or service.
No need to any accounting entry. only Valuation of material shown in balance sheet at the end of financial year.
but wait for other experts openion.
No need to any accounting entry. only Valuation of material shown in balance sheet at the end of financial year.
but wait for other experts openion.
16 May 2010
Indeed a good question...
well, i think we can even treat it as a WIP for the Item B. so we can value at 25 not as a raw material but as WIP.
Experts opinion still awaited....
well, i think we can even treat it as a WIP for the Item B. so we can value at 25 not as a raw material but as WIP.
Experts opinion still awaited....
17 May 2010
Shivang Ji your view is also interesting but i agree with view expressed by Ram Avtar Ji.
18 May 2010
The person interviewing me gave a hint as to Stock Reserve. What is this concept and how can it be applied in this case.
20 May 2010
Many a times, it so happens that a manufacturer, consignor or a head office does not directly engage in selling its products. It instead sends or consigns the goods to a profit centre--a dedicated centre for selling its products.
The profit centre in case of a consignor is a consignee and in the case of a head office, its branch or retail outlet. Now when the principal sends the goods to the profit centre, it issues/transfers the goods at a price which is higher than the cost of production of those goods. This price is generally called Invoice Price (I.P.) and this is the value at which the branch/consignor records the receipt of the same. When the branch sells these goods it sells at a price greater than the I.P. thus earning a profit which has two components--
1: The mark up on the cost of production (i.e., the difference between the I.P. and the cost of production), and
2: The profit made by the branch/consignee (i.e., the difference between seeling price of the branch and I.P.)
At the end of the accounting period, any stock is lying unsold with the branch/consignee is having the value of I.P. (at which the head office/consignor had issued the goods). But as per AS-2, inventory can only be valued at cost or NRV, whichever is lower. The excess mark-up on the value of the goods needs to be removed as that is unrealised profit.
This unrealised profit is given a name in accountancy - STOCK RESERVE.
The profit centre in case of a consignor is a consignee and in the case of a head office, its branch or retail outlet. Now when the principal sends the goods to the profit centre, it issues/transfers the goods at a price which is higher than the cost of production of those goods. This price is generally called Invoice Price (I.P.) and this is the value at which the branch/consignor records the receipt of the same. When the branch sells these goods it sells at a price greater than the I.P. thus earning a profit which has two components--
1: The mark up on the cost of production (i.e., the difference between the I.P. and the cost of production), and
2: The profit made by the branch/consignee (i.e., the difference between seeling price of the branch and I.P.)
At the end of the accounting period, any stock is lying unsold with the branch/consignee is having the value of I.P. (at which the head office/consignor had issued the goods). But as per AS-2, inventory can only be valued at cost or NRV, whichever is lower. The excess mark-up on the value of the goods needs to be removed as that is unrealised profit.
This unrealised profit is given a name in accountancy - STOCK RESERVE.
20 May 2010
From the definition of Stock reserve it is clear that it is marked up profit of stock which is realised.
So we can assume that it is inter unit transfer which involves profit element and will be the stock reserve....
From the definition of Stock reserve it is clear that it is marked up profit of stock which is realised.
So we can assume that it is inter unit transfer which involves profit element and will be the stock reserve....
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