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Financial Reporting · Ind AS 2 Inventories

Ind AS 2: Other Costs and Costs Excluded from Inventories

Updated 5 October 2026 · Fact-checked

Under Ind AS 2, inventory cost includes other costs only to the extent they bring inventories to their present location and condition, such as product design costs for specific customers and borrowing costs on qualifying inventories. Abnormal wastage, storage (unless necessary in production), administrative overheads and selling costs are expensed. Test each cost for necessity, then classify it.

Understand Other Costs and Costs Excluded from Inventories

Ind AS 2 says cost of inventories comprises purchase costs, conversion costs and other costs incurred in bringing the inventories to their present location and condition. The last phrase is the test for everything on this page. If the cost was needed to get the stock to where it is and what it is, it goes into cost. If not, it is an expense of the period.

Other costs includable. Some costs are not purchase or conversion costs but still qualify. A common example is the cost of designing products for specific customers. If you design a product to a particular customer's order, that design cost can form part of the inventory cost of that order. Another is borrowing costs. Ind AS 23 allows capitalisation of borrowing costs on a qualifying asset, which is an asset that necessarily takes a substantial period to get ready for its intended use or sale. Inventories can be qualifying assets, for example maturing wine, or real estate under construction held for sale. Ind AS 23 requires capitalisation of eligible borrowing costs for such inventories. Ind AS 23 does not require its application to inventories manufactured routinely or in large quantities on a repetitive basis over a short period. So interest on those is normally expensed.

Costs excluded. Ind AS 2 lists examples that are recognised as expenses in the period they are incurred:

  • Abnormal amounts of wasted materials, labour or other production costs.
  • Storage costs, unless those costs are necessary in the production process before a further production stage.
  • Administrative overheads that do not contribute to bringing inventories to their present location and condition.
  • Selling costs.

Why abnormal waste is excluded. Normal loss is an unavoidable part of production, so its cost is absorbed in the cost of good units. Abnormal loss is an inefficiency or an unexpected event. Carrying it in inventory would overstate the asset, so you charge it to profit or loss.

Link to old AS 2. Ind AS 2 expressly requires borrowing costs on qualifying inventories to be included in cost as per Ind AS 23. AS 2 generally treats interest and other borrowing costs as excluded from cost, except where AS 16 permits. This is a point of difference you can cite. At CA Final, Ind AS 2 is your only framework.

Key rules to remember

Cost of inventories
Cost = Purchase costs + Conversion costs + Other costs incurred in bringing inventories to present location and condition
The 'present location and condition' test decides whether any extra cost is included.
Normal vs abnormal loss
Normal loss: absorbed in cost of good output. Abnormal loss: expensed in the period
Abnormal loss is valued at the same cost per unit as good units, then charged to profit or loss.
Cost per unit with normal loss
Cost per good unit = Total cost of input ÷ (Input units − Normal loss units)
Abnormal loss units are taken out of the closing stock and expensed.
Excluded costs
Abnormal waste, storage (unless necessary in production), non-contributing administrative overheads, selling costs → expense
Storage before a further production stage can be included, such as maturing in cask before the next stage.
Borrowing costs in inventories
Capitalise per Ind AS 23 only if inventory is a qualifying asset (substantial period to get ready)
For routine, short-cycle or repetitively manufactured inventories, Ind AS 23 does not require its application, so interest is normally expensed.

How to solve Other Costs and Costs Excluded from Inventories questions

Use this sequence for any question that asks whether a cost goes into inventory or how to treat a loss or overhead.

  1. 1List every cost mentioned in the case, with its amount.
  2. 2For each cost, ask: was it incurred to bring the inventory to its present location and condition? If no, it is an expense.
  3. 3Check the named exclusions: abnormal waste, storage, non-contributing administrative overheads, selling costs.
  4. 4For storage, check whether it is necessary in the production process before a further production stage. If yes, include it.
  5. 5For interest, decide whether the inventory is a qualifying asset under Ind AS 23. Take only eligible borrowing costs, for the capitalisation period.
  6. 6Separate normal and abnormal loss. Spread normal loss over good units. Charge abnormal loss at cost to profit or loss.
  7. 7Add the includable costs to get total cost, divide by good units for cost per unit, and compare with NRV if asked.
  8. 8Write the conclusion with the Ind AS 2 reason for each item.

Quickest way: Include or expense in three questions

When to use it: Use for MCQs and short cost-classification questions where you must tick items in or out quickly.

  1. Is it purchase or conversion cost? Include.
  2. Otherwise, does it bring stock to present location and condition (design for a customer, eligible borrowing cost, necessary pre-stage storage)? Include.
  3. Anything else, especially abnormal waste, general storage, admin overheads, selling costs, is an expense.

Common mistakes in Other Costs and Costs Excluded from Inventories

  • Including abnormal wastage in the cost of closing stock

    Students treat all loss as part of production cost.

    Fix: Only normal loss is absorbed. Value abnormal loss at the cost of good units and charge it to profit or loss.

  • Excluding all storage costs

    Students memorise 'storage is excluded' without the exception.

    Fix: Include storage that is necessary in the production process before a further production stage, such as maturing before the next stage.

  • Capitalising interest on every inventory item

    Students think borrowing costs are always part of cost.

    Fix: Capitalise only for qualifying inventories that take a substantial period to get ready. For routine, repetitive, short-cycle stock, Ind AS 23 does not require capitalisation.

  • Including head-office administrative costs in conversion cost

    Students confuse production overheads with administrative overheads.

    Fix: Include only administrative costs that contribute to bringing inventories to present location and condition. General administration is an expense.

  • Adding selling and distribution costs to cost for NRV comparison

    Students mix up cost with the costs to sell used in NRV.

    Fix: Selling costs are never in cost. They are deducted from selling price when computing NRV.

  • Using old AS 2 reasoning in answers

    Older notes and habits carry over.

    Fix: Quote Ind AS 2 and Ind AS 23 only. Link the borrowing cost point to Ind AS 23.

Worked examples

Example 1

Delta Ltd manufactures 10,000 units of a product to a customer's specification. Costs: materials ₹4,00,000, direct labour ₹2,00,000, production overheads ₹1,00,000, design cost specific to this customer's order ₹50,000, selling costs ₹40,000, general administrative overheads ₹30,000, and storage of finished goods awaiting dispatch ₹20,000. Compute the cost of inventories under Ind AS 2.

Show the solution
  1. Materials ₹4,00,000, labour ₹2,00,000 and production overheads ₹1,00,000 are purchase and conversion costs: include ₹7,00,000.
  2. Design cost specific to the customer's order brings the product to its present condition: include ₹50,000.
  3. Selling costs ₹40,000 are excluded: expense.
  4. General administrative overheads ₹30,000 do not contribute to bringing stock to present location and condition: expense.
  5. Storage of finished goods awaiting dispatch is not necessary in production before a further stage: expense ₹20,000.
  6. Total cost = ₹7,00,000 + ₹50,000 = ₹7,50,000. Cost per unit = ₹7,50,000 ÷ 10,000 = ₹75.

Answer: Cost of inventories is ₹7,50,000 (₹75 per unit). ₹90,000 (selling ₹40,000, administration ₹30,000, storage ₹20,000) is charged to profit or loss.

Example 2

Kiran Ltd starts a batch with 1,000 kg of raw material costing ₹50 per kg, and incurs conversion costs of ₹20,000. Normal loss is 5% of input. Actual output is 900 kg. At year end all 900 kg are in stock. Compute the cost of closing inventory and the amount charged to profit or loss for abnormal loss.

Show the solution
  1. Total cost = 1,000 × ₹50 + ₹20,000 = ₹70,000.
  2. Normal loss = 5% × 1,000 = 50 kg. Expected good output = 950 kg.
  3. Cost per good kg = ₹70,000 ÷ 950 = ₹73.684 (approx).
  4. Abnormal loss = 950 − 900 = 50 kg. Value = ₹70,000 × 50 ÷ 950 = ₹3,684.21 (approx).
  5. Closing inventory = ₹70,000 − ₹3,684.21 = ₹66,315.79 (equivalently 900 × ₹70,000 ÷ 950), which is about ₹66,316.
  6. The abnormal loss of ₹3,684.21 is expensed, not carried in inventory.

Answer: Closing inventory is about ₹66,315.79 (≈ ₹66,316) and abnormal loss of about ₹3,684.21 is charged to profit or loss. Normal loss is absorbed in cost per kg.

Exam tips

  • In case-scenario MCQs, look for words like 'abnormal', 'selling', 'general administration' and 'awaiting dispatch'. These usually signal expense.
  • For borrowing costs, check whether the inventory takes a substantial period to get ready. If the case says routine or repetitive manufacture, do not capitalise.
  • In written answers, give the rule first, then apply it to each cost, then conclude with the amount. Show cost per unit clearly.
  • Always separate normal and abnormal loss in numerical questions, and show the abnormal loss amount charged to profit or loss.
  • If the question asks for differences from old AS 2, you can cite borrowing costs. Ind AS 2 expressly requires borrowing costs on qualifying inventories to be included as per Ind AS 23, whereas AS 2 generally treats interest as excluded, except where AS 16 permits. Then answer with the Ind AS 2 treatment.

Practice questions from Ind AS 2 Inventories

Other Costs and Costs Excluded from Inventories in other exams

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

Other Costs and Costs Excluded from Inventories: frequently asked questions

Are borrowing costs always included in inventory cost under Ind AS 2?

No. They are included only when the inventory is a qualifying asset under Ind AS 23, meaning it takes a substantial period to get ready for sale. For routinely manufactured, short-cycle inventories, Ind AS 23 does not require its application, so interest is normally expensed.

How is abnormal wastage treated under Ind AS 2?

Abnormal wastage of materials, labour or other production costs is recognised as an expense in the period. It is not part of inventory cost. Normal loss is absorbed in the cost of good units.

Can storage costs ever be included in inventory cost?

Yes. Storage costs are included when they are necessary in the production process before a further production stage. General storage of finished goods is expensed.

Are selling costs part of inventory cost?

No. Selling costs are always expensed. They matter only when you compute net realisable value, where they are deducted from the estimated selling price.

Is the Ind AS 2 treatment different from AS 2?

Ind AS 2 is the standard you must apply at CA Final. Borrowing costs are one difference. Ind AS 2 expressly requires borrowing costs on qualifying inventories to be included as per Ind AS 23, whereas AS 2 generally treats interest as excluded, except where AS 16 permits.