Question 2 (b)
Closing inventory: group method and item-by-item method
6 marks
- Time to write
- About 12 minutes
- Notes
- Crux notes
Question
Question 2 (b) · 6 marksNeelkanth Ltd gives you these details of its inventory for the year 2023-24. By (a) Group method; (b) Item by item method, find out the value of the closing inventory:
| Article | Group | No. of units | Unit cost (₹) | Realizable value per unit (₹) | Realization expenses |
|---|---|---|---|---|---|
| 1. | A | 240 | 120 | 144 | 25/3% |
| 2. | B | 480 | 240 | 240 | 10% |
| 3. | A | 720 | 180 | 192 | 25/3% |
| 4. | B | 960 | 300 | 360 | 10% |
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- find outFormula first, then the working, then the answer with its unit (₹, %, units).
What the paper leaves open
- "25/3%" is read as 25/3 per cent, that is 8⅓%, of the realisable value.
- Net realisable value is the realisable value less the realisation expenses. Under the group method, each group's total cost is compared with its total net realisable value and the lower taken; under the item-by-item method, the lower of cost and net realisable value is taken article by article.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 NRV per unit for each article 1 mark 2 min
- 2 Group method 2 marks 3 min
- 3 Item-by-item method 2 marks 3 min
- 4 Why they differ; AS-2's normal basis 1 mark 2 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
The rule. Under AS-2, inventory is valued at the lower of cost and net realisable value. Net realisable value is the estimated selling price less the estimated costs of completion and the costs necessary to make the sale; here, the realisable value less the realisation expenses. The comparison is normally made item by item, though in some circumstances it may be appropriate to group similar or related items.
1On the shelf, each blue vase stands by its little stack of coins—stock, priced.
Basic rule of measurementInventories are valued at the lower of cost and net realisable value.
2Clay arriving, the potter at the wheel, the kiln burning—every step adds to cost.
What cost includesCosts of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
3The spoiled batch swept from the kiln floor counts nowhere—abnormal waste stays out.
What cost excludesAbnormal amounts of wasted materials, labour or other production costs.
4A cracked vase on the table: it goes in the books at what it can still fetch.
Write-down to net realisable valueInventories are written down below cost if they are damaged or obsolete, or if their selling prices have fallen.
NRV per unit. Group A: realisable value less 25/3% (8⅓%, one-twelfth); group B: realisable value less 10%.
| Article | NRV per unit (₹) | Cost (₹) | Lower per unit (₹) | Units | Cost total (₹) | NRV total (₹) |
|---|---|---|---|---|---|---|
| 1 (A) | 144 − 12 = 132 | 120 | 120 | 240 | 28,800 | 31,680 |
| 2 (B) | 240 − 24 = 216 | 240 | 216 | 480 | 1,15,200 | 1,03,680 |
| 3 (A) | 192 − 16 = 176 | 180 | 176 | 720 | 1,29,600 | 1,26,720 |
| 4 (B) | 360 − 36 = 324 | 300 | 300 | 960 | 2,88,000 | 3,11,040 |
(a) Group method: lower of total cost and total NRV for each group
| Group | Cost (₹) | NRV (₹) | Value: lower (₹) |
|---|---|---|---|
| A (articles 1, 3) | 28,800 + 1,29,600 = 1,58,400 | 31,680 + 1,26,720 = 1,58,400 | 1,58,400 |
| B (articles 2, 4) | 1,15,200 + 2,88,000 = 4,03,200 | 1,03,680 + 3,11,040 = 4,14,720 | 4,03,200 |
| Closing inventory: group method | 5,61,600 |
In group A, total cost and total NRV happen to be equal, so either gives ₹1,58,400.
(b) Item-by-item method: lower of cost and NRV for each article
| Article | Basis | Value (₹) |
|---|---|---|
| 1 | Cost (120 < 132) × 240 | 28,800 |
| 2 | NRV (216 < 240) × 480 | 1,03,680 |
| 3 | NRV (176 < 180) × 720 | 1,26,720 |
| 4 | Cost (300 < 324) × 960 | 2,88,000 |
| Closing inventory: item-by-item | 5,47,200 |
Why the two differ by ₹14,400. Under the group method, the margin on article 4 (NRV above cost) is set off against the fall in value of article 2 within group B, and the margin on article 1 offsets the fall on article 3 within group A. Item by item, every fall in value is recognised in full and no gain is anticipated, so the item-by-item figure is the lower and more prudent one. AS-2's normal basis is item by item: ₹5,47,200.
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | NRV per unit for each article | 1 |
| 2 | Group method (₹5,61,600) | 2 |
| 3 | Item-by-item method (₹5,47,200) | 2 |
| 4 | Why they differ; AS-2's normal basis | 1 |
| Total | 6 |
Report a problemopens an email to admin@getkunji.com with the question ID206-Q2balready filled in.