Question 2 OR (b)
Inventory valuation at lower of cost and NRV (AS-2)
6 marks
- Time to write
- About 12 minutes
- Notes
- Crux notes
Question
Question 2 OR (b) · 6 marksMr. Ketan gives the following information about the items forming part of the inventory as on 31.03.2024. His enterprise produces product Q using Raw Material Y.
1,200 units of Raw Material Y (purchased @ 120 per unit). Replacement cost of Raw Material Y as on 31.03.2024 is 95 per unit.
500 units of partly finished goods in the process of producing Q. Cost incurred till date is 300 per unit. These units can be finished next year at an additional cost of * 60 per unit.
1,000 units of Finished goods Q and total cost incurred is 360 per unit. Expected selling price of product Q is 340 per unit, subject to a payment of 5% brokerage on the selling price.
Determine how each inventory item will be valued as on 31.03.2024. Also calculate the value of total Inventory as on 31.03.2024.
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
- Determine…Calculate…2 asks, each with its own marks below. Answer both.
- DetermineFormula first, then the working, then the answer with its unit (₹, %, units).
What the paper leaves open
- "* 60" in item (ii) is a misprinted rupee sign and is read as ₹60.
- The partly finished goods' net realisable value is the finished product's net realisable value less the cost to complete.
- Because the finished product sells below cost, the raw material is written down to its replacement cost, the best available measure of its net realisable value.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Valuing finished goods and raw material NRV / replacement cost link 3 marks 5 min
- 2 Valuing WIP at NRV and totalling the inventory 3 marks 5 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.
AS-2 requires inventory to be carried at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost required to make the sale. This follows the convention of conservatism, under which an overstatement of assets and net income is treated as more serious than an understatement, so assets are carried at the lower value. Brokerage on the selling price = 5% × 340 = ₹17 per unit.
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.
Item-by-item valuation
| Item | Cost/unit (₹) | Net realisable value/unit (₹) | Valued at (₹) | Units | Total (₹) |
|---|---|---|---|---|---|
| Finished goods Q | 360 | 340 − 17 = 323 | 323 | 1,000 | 3,23,000 |
| Raw Material Y | 120 | replacement cost 95 | 95 | 1,200 | 1,14,000 |
| Work in progress | 300 | 340 − 60 − 17 = 263 | 263 | 500 | 1,31,500 |
- Finished goods Q sell at ₹323 net (₹340 − ₹17 brokerage), which is below cost ₹360, so they are written down to NRV ₹323.
- Raw Material Y is written down to its replacement cost ₹95 only because the finished product in which it will be used is expected to be sold at a loss; had the finished product been profitable, the raw material would have stayed at cost.
- Work in progress is valued at its NRV: the finished selling price less the cost still to be incurred and the selling cost: 340 − 60 − 17 = ₹263 (below cost ₹300).
| Total inventory | ₹ |
|---|---|
| Raw Material Y | 1,14,000 |
| Work in progress | 1,31,500 |
| Finished goods Q | 3,23,000 |
| Total inventory | 5,68,500 |
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Valuing finished goods and raw material (NRV / replacement cost link) | 3 |
| 2 | Valuing WIP at NRV and totalling the inventory (₹5,68,500) | 3 |
| Total | 6 |
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