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valuation of INVENTORIES

05 March 2018

AS PER PARA 24 of AS 2 - VALUATION OF INVENTORIES

HOWEVER, THERE HAS BEEN A DECLINE IN THE PRICE OF RAW MATERIAL AND IT IS ESTIMATED THAT THE COST OF FINISHED PRODUCTS WELL EXCEED NET REALISABLE VALUE,THE MATERIALS ARE WRITTEN DOWN TO NRV

CAN ANYONE EXPLAIN IN SIMPLE WORDS

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3 Replies

Balaji Ramalingam (Student - CA Final) (285 Points)
Replied 05 March 2018

Usually Raw Materials are not valued at cost or NRV whichever is lower concept, when the selling price of the finished goods is more than the cost. In case it is estimated that the cost of FG will exceed NRV and price of RM has also decreased then both FG and RM have to be valued at NRV because, when FG itself is not able to fetch more than it's cost, there is no logic in valuing RM at a higher value (cost). This is my view.

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Jalaj Soni (Student CA IPC / IPCC) (22 Points)
Replied 07 March 2018

RM cost - 20
RM nrv - 15

FG cost - 115
FG nrv - 125

Will you write down RM to 15, ie it's nrv?

No, because FG's cost includes the cost of RM and FG's nrv covers the cost of FG

Therefore, no write down is required

satish (teaching) (2046 Points)
Replied 07 March 2018

cost of raw materail = 100

Processing cost = 200

Cost of Finished goods= 300

Case	Raw Material		Finished goods		As per AS 2
	Cost	NRV	Cost	NRV	Raw Material
1	100	110	300	320	100
2	100	100	300	320	100
3	100	98	300	320	100
4	100	100	300	300	100
5	100	110	300	300	100
6	100	98	300	300	100
7	100	110	300	275	100
8	100	100	300	275	100
9	100	98	300	275	98

Generally Raw material is valued at cost price only, when NRV of F.G >= Cost of F.G.
Because of raw material we have purchased for processing only.
When NRV of FG< Cost of FG then we need to check about raw material.
If cost of raw material < NRV of Raw materail case we can raw material itself at profit,
in this case also raw material is valued at cost price.
But if Cost pof R/m > Nrv of R/m, then raw material is to be valued at Replacement cost price.
i.e. NRV of R/m.