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Financial Reporting · Ind AS 2 Inventories

Ind AS 2 Cost Measurement Techniques: Standard Cost, Retail, FIFO, Weighted Average

Updated 5 October 2026 · Fact-checked

Ind AS 2 lets you assign cost to inventory using specific identification (for items not ordinarily interchangeable), FIFO or weighted average (for interchangeable items). Standard cost and the retail method are shortcuts allowed only if results approximate actual cost. LIFO is prohibited. To solve, pick the correct formula, compute closing stock, and reconcile.

Understand Cost Measurement Techniques: Standard Cost, Retail, FIFO, Weighted Average

Inventory is bought or made at different prices through the year. When you sell some units, you must decide which cost goes to cost of goods sold and which stays in closing stock. That is the cost formula problem.

Ind AS 2 gives two levels of answer. First, specific identification applies to items that are not ordinarily interchangeable, and to goods or services produced and segregated for specific projects. You track the actual cost of each item. Second, for ordinary interchangeable items, you use FIFO or weighted average cost. The standard says you should use the same cost formula for all inventories with a similar nature and use to the entity. For inventories with a different nature or use, different formulas may be justified. A difference in geographical location alone does not justify a different formula.

Under FIFO, the items bought first are assumed sold first. Closing stock therefore carries the latest costs. Under weighted average, the cost of each item is the weighted average of the cost of similar items at the start of the period and those bought or produced during the period. The average may be computed periodically or on each new receipt.

LIFO is not permitted by Ind AS 2. It assumes the latest purchases are sold first, so closing stock carries old costs. That can leave inventory on the balance sheet at a figure far from recent cost. So the standard bars it.

Two techniques are only practical means of measuring cost. The standard cost method uses normal levels of materials, supplies, labour, efficiency and capacity utilisation. Standards are reviewed regularly and revised where needed. The retail method is often used in retail businesses with large numbers of rapidly changing items with similar margins. It reduces the sales value of inventory by an appropriate gross margin percentage to get cost. Both are allowed only if the result approximates cost.

Key rules to remember

Specific identification
Cost = actual cost of each identified item
Required for items not ordinarily interchangeable and for goods or services segregated for specific projects. Choosing between formulas is not allowed here.
FIFO
Closing stock cost = cost of the most recent purchases, up to the units on hand
Units sold are costed from the opening stock and earliest purchases first.
Weighted average cost
Average cost per unit = (Cost of opening stock + Cost of purchases) ÷ (Opening units + Units purchased)
Computed periodically, or after each receipt (moving average). Closing stock = units on hand × average cost.
Retail method – cost to retail ratio
Cost-to-retail % = (Opening stock at cost + Purchases at cost) ÷ (Opening stock at retail + Purchases at retail ± markups/markdowns)
Closing stock at cost = closing stock at retail × cost-to-retail %. Adjust retail figures for markdowns consistently with the entity's policy.
Retail method – gross margin form
Cost of inventory = Selling price of inventory × (1 − gross margin %)
Use the average percentage for each retail department, and adjust where prices have been marked down below original selling price.
Standard cost
Inventory cost = units × standard cost per unit
Allowed only if it approximates actual cost. Review and revise standards regularly.
LIFO
Not permitted
Ind AS 2 does not allow the last-in, first-out cost formula.

How to solve Cost Measurement Techniques: Standard Cost, Retail, FIFO, Weighted Average questions

Use this order for any question on cost formulas or techniques.

  1. 1Read the nature of the items. If they are not ordinarily interchangeable or are segregated for a specific project, use specific identification.
  2. 2If items are interchangeable, check what formula the question names. If it names LIFO, say it is not permitted and recompute using FIFO or weighted average.
  3. 3Prepare a stock table of units and cost: opening, each purchase, each issue or sale, and balance.
  4. 4Apply the formula. For FIFO, issue from the oldest layer. For weighted average, divide total cost by total units at the chosen point.
  5. 5For retail or standard cost method, state that it is used only if it approximates cost, then compute using the ratio or standard.
  6. 6Compute closing stock and cost of goods sold. Check that opening stock + purchases − closing stock = cost of goods sold.
  7. 7Compare with net realisable value if given, and carry inventory at the lower of cost and NRV.
  8. 8Write the conclusion in one line with the figure.

Quickest way: Layer table and reconciliation check

When to use it: Use when you have several purchases and sales and limited time.

  1. Write each purchase as a line: units × rate = amount.
  2. For FIFO, compute closing stock directly from the latest purchase lines working backwards until units on hand are covered.
  3. For weighted average, compute total cost ÷ total units once for periodic basis. Multiply by closing units.
  4. Get cost of goods sold by subtraction from total cost available.
  5. Check: closing stock + cost of goods sold = opening stock + purchases.

Common mistakes in Cost Measurement Techniques: Standard Cost, Retail, FIFO, Weighted Average

  • Using LIFO because the question mentions rising prices

    Students remember LIFO from other frameworks or cost accounting.

    Fix: State that Ind AS 2 prohibits LIFO and use FIFO or weighted average.

  • Using FIFO or weighted average for an item that is not interchangeable

    Students apply the common formulas by habit.

    Fix: If items are not ordinarily interchangeable or are segregated for a project, use specific identification.

  • Using different formulas for similar stock because of different locations

    Students think location justifies a different method.

    Fix: Different geographical location alone does not justify a different formula. Use one formula for inventories of similar nature and use.

  • Applying the retail method ratio to retail figures without adjusting for markdowns

    Students ignore price reductions in the retail column.

    Fix: Adjust retail amounts for markdowns as the question directs, then apply the cost-to-retail ratio to closing stock at retail.

  • Treating standard cost as always acceptable

    It is a convenient figure and students skip the condition.

    Fix: State that standard cost is allowed only if it approximates actual cost, and standards are reviewed and revised regularly.

  • Forgetting weighted average needs the opening stock

    Students average only the purchases.

    Fix: Include opening units and cost in both numerator and denominator.

Worked examples

Example 1

Case: Meera Traders deals in identical steel sheets. Opening stock: 100 units at ₹50. Purchases: 200 units at ₹60 on 10 June and 100 units at ₹70 on 20 June. It sold 250 units during June. Compute closing stock and cost of goods sold using (a) FIFO and (b) periodic weighted average.

Show the solution
  1. Units available = 100 + 200 + 100 = 400. Closing units = 400 − 250 = 150.
  2. Total cost available = (100 × 50) + (200 × 60) + (100 × 70) = 5,000 + 12,000 + 7,000 = ₹24,000.
  3. (a) FIFO: closing 150 units come from the latest purchases: 100 units at ₹70 = ₹7,000 and 50 units at ₹60 = ₹3,000. Closing stock = ₹10,000.
  4. FIFO cost of goods sold = 24,000 − 10,000 = ₹14,000. Check: 100 × 50 + 150 × 60 = 5,000 + 9,000 = 14,000.
  5. (b) Weighted average cost per unit = 24,000 ÷ 400 = ₹60.
  6. Closing stock = 150 × 60 = ₹9,000. Cost of goods sold = 250 × 60 = ₹15,000. Check: 9,000 + 15,000 = 24,000.

Answer: FIFO: closing stock ₹10,000; cost of goods sold ₹14,000. Weighted average: closing stock ₹9,000; cost of goods sold ₹15,000. LIFO cannot be used under Ind AS 2.

Example 2

Case: A department store estimates closing stock using the retail method. Opening stock: cost ₹2,00,000, retail ₹3,00,000. Purchases: cost ₹10,00,000, retail ₹15,00,000. Sales for the period: ₹14,00,000. No markups or markdowns. Compute closing stock at cost.

Show the solution
  1. Cost of goods available = 2,00,000 + 10,00,000 = ₹12,00,000.
  2. Retail value of goods available = 3,00,000 + 15,00,000 = ₹18,00,000.
  3. Cost-to-retail ratio = 12,00,000 ÷ 18,00,000 = 2/3 = 66.67%.
  4. Closing stock at retail = 18,00,000 − 14,00,000 = ₹4,00,000.
  5. Closing stock at cost = 4,00,000 × 2/3 = ₹2,66,667 (rounded).
  6. Ind AS 2 permits this method only if the result approximates cost, which is the usual position when items have similar margins.

Answer: Closing stock at cost is about ₹2,66,667, using a cost-to-retail ratio of 66.67%.

Exam tips

  • Open with the rule: specific identification for non-interchangeable items, FIFO or weighted average otherwise, LIFO prohibited. Examiners reward this framing.
  • In a case with identical goods and a named LIFO policy, say it is not allowed and recompute. Do not just compute the LIFO figure.
  • Always show the reconciliation of opening stock plus purchases to closing stock plus cost of goods sold. It protects marks if one figure is wrong.
  • For standard cost and retail method, mention the condition that the result must approximate cost.
  • In MCQs, check for the trap of different formulas for different locations. That is not justified by location alone.

Practice questions from Ind AS 2 Inventories

Cost Measurement Techniques: Standard Cost, Retail, FIFO, Weighted Average in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Cost Measurement Techniques: Standard Cost, Retail, FIFO, Weighted Average: frequently asked questions

Why is LIFO not allowed in Ind AS 2?

Ind AS 2 does not permit the last-in, first-out formula. Under LIFO, closing stock is carried at old costs, so the balance sheet can show inventory far from recent cost. You must use FIFO or weighted average instead.

When is specific identification of cost used?

It is used for inventories that are not ordinarily interchangeable, and for goods or services produced and segregated for specific projects. You assign the actual cost of each item. You cannot choose FIFO or average for these.

Can a company use FIFO for one stock and weighted average for another?

Yes, if the inventories differ in nature or use. For inventories of similar nature and use, the same formula must apply. A different geographical location alone does not justify a different formula.

When can standard cost or the retail method be used?

Only for convenience, and only if the results approximate cost. Standard cost must reflect normal levels of materials, labour, efficiency and capacity, and be reviewed regularly. The retail method suits retailers with many fast-changing items of similar margins.