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Cost and Management Accounting · Material Cost

Valuation of Inventory and Inventory Turnover for CA Intermediate

Updated 4 October 2026 · Fact-checked

Inventory is valued at the lower of cost and net realisable value (NRV). Cost includes purchase price, duties, freight and other costs to bring items to their present location and condition. Inventory turnover ratio = cost of material consumed ÷ average stock. It shows how fast stock moves and helps you spot slow-moving items.

Understand Valuation of Inventory and Inventory Turnover

Inventory (stock) is material you hold for use in production or for sale. At the year end, you must show it in the books at a fair value. If you value it too high, profit is overstated. If too low, profit is understated.

AS 2 (Valuation of Inventories) and Ind AS 2 both say the same core thing: value inventory at the lower of cost and net realisable value. Cost is what you spent to bring the item to its present location and condition. NRV is the estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs needed to make the sale.

Cost includes the purchase price, import duties and non-refundable taxes, freight inward, loading and unloading, and other costs directly attributable to acquisition. Trade discounts and rebates are deducted. Recoverable taxes (such as input tax credit) are not part of cost. Storage costs are excluded unless needed in the production process before a further stage. Selling costs, abnormal wastage and general administration overheads are also excluded.

Inventory turnover tells you how quickly stock is used or sold. A high ratio means fast movement. A low ratio means stock is sitting in the store. The ratio is often converted into days of inventory holding. Items with very low turnover are slow-moving. Items with no issue for a long time are non-moving.

In exams, you usually do two jobs: find the correct value of closing stock using cost and NRV item by item, and compute turnover ratios to comment on stock movement.

Key rules to remember

Inventory valuation rule
Value of inventory = Lower of (Cost, Net Realisable Value)
Apply item by item or to groups of similar items, not to the total of all stock mixed together.
Net realisable value
NRV = Estimated selling price − Estimated cost of completion − Estimated selling costs
For raw materials held for use, NRV of the finished product decides whether a write-down is needed.
Cost of inventory
Cost = Purchase price + Duties and non-recoverable taxes + Freight inward + Other directly attributable costs − Trade discounts and rebates
Exclude recoverable taxes, abnormal losses, storage (generally), selling and administration costs.
Inventory turnover ratio
Inventory turnover ratio = Cost of material consumed ÷ Average stock of material
Use cost of goods sold for finished goods. Result is in times per period.
Average stock
Average stock = (Opening stock + Closing stock) ÷ 2
If only closing stock is given, use it, and state that assumption.
Inventory holding period
Days of inventory holding = Number of days in period ÷ Inventory turnover ratio
Use 365 days for a year unless the question says otherwise, 360 if stated.

How to solve Valuation of Inventory and Inventory Turnover questions

Use this order for valuation and turnover questions. It keeps your working clean and earns step marks.

  1. 1Read what is asked: valuation of stock, turnover ratio, or both. Note the period and the number of days.
  2. 2List each item separately with its quantity, cost and expected selling price.
  3. 3Compute cost per unit by adding purchase price and directly attributable costs, and deducting trade discounts. Leave out recoverable taxes and abnormal losses.
  4. 4Compute NRV per unit: selling price less further processing cost and selling expenses.
  5. 5Pick the lower of cost and NRV for each item, then multiply by quantity.
  6. 6Total the values to get closing inventory and state any write-down.
  7. 7For turnover, find consumption, average stock, then the ratio, then days of holding.
  8. 8Write a one-line comment: high turnover means efficient use, low turnover means slow-moving stock and blocked funds.

Quickest way: Table method for lower of cost and NRV

When to use it: Use this for any multi-item valuation question and for MCQs on inventory cost.

  1. Draw columns: Item, Qty, Cost/unit, NRV/unit, Lower, Value. Fill row by row.
  2. In MCQs, first strike out options that include selling costs, recoverable taxes or abnormal wastage in cost.
  3. If NRV is above cost, the answer is cost. Only compute NRV fully when it looks close to or below cost.
  4. For turnover MCQs, check whether the question gives consumption or purchases. Compute consumption first if needed: Opening stock + Purchases − Closing stock.
  5. In written answers, show the formula, the substituted numbers and a one-line conclusion. Each earns marks even if arithmetic slips.

Common mistakes in Valuation of Inventory and Inventory Turnover

  • Including recoverable GST or other input tax credit in the cost of inventory

    Students add the invoice total without checking which taxes can be claimed back.

    Fix: Take the purchase price net of recoverable taxes. Add only non-recoverable duties and taxes.

  • Comparing total cost with total NRV instead of item by item

    It looks faster and gives one neat figure.

    Fix: Compare for each item or group of similar items. A gain on one item cannot offset a loss on another.

  • Forgetting to deduct estimated selling costs and completion costs when computing NRV

    Students treat the expected selling price as NRV.

    Fix: Always write NRV = selling price − completion cost − selling cost before the comparison.

  • Using purchases instead of consumption in the turnover ratio

    Both are in the question and purchases appears first.

    Fix: Compute consumption = Opening stock + Purchases − Closing stock. Then divide by average stock.

  • Including abnormal wastage, storage or administration overheads in inventory cost

    Students assume every cost related to the material is a cost of stock.

    Fix: Abnormal losses, selling costs and general administration overheads are charged to profit and loss, not added to stock.

  • Writing days of holding as turnover ÷ 365

    The division is reversed under time pressure.

    Fix: Days = 365 ÷ turnover ratio. A higher ratio must give fewer days.

Worked examples

Example 1

A company has three items in stock at year end. Item A: 100 units, cost ₹50 per unit, selling price ₹70, selling expenses ₹5 per unit. Item B: 200 units, cost ₹40 per unit, selling price ₹42, selling expenses ₹4 per unit. Item C: 50 units, cost ₹80 per unit, selling price ₹100, further processing cost ₹10 per unit, selling expenses ₹6 per unit. Value the closing inventory.

Show the solution
  1. Item A: NRV = 70 − 5 = ₹65 per unit. Cost is ₹50. Lower is ₹50. Value = 100 × 50 = ₹5,000.
  2. Item B: NRV = 42 − 4 = ₹38 per unit. Cost is ₹40. Lower is ₹38. Value = 200 × 38 = ₹7,600.
  3. Item C: NRV = 100 − 10 − 6 = ₹84 per unit. Cost is ₹80. Lower is ₹80. Value = 50 × 80 = ₹4,000.
  4. Total closing inventory = 5,000 + 7,600 + 4,000 = ₹16,600.
  5. Cost of all items = 5,000 + 8,000 + 4,000 = ₹17,000. Write-down on Item B = 17,000 − 16,600 = ₹400.

Answer: Closing inventory is valued at ₹16,600, after a write-down of ₹400 on Item B.

Example 2

For a year of 365 days, a firm has opening stock of material ₹1,20,000, purchases ₹7,80,000 and closing stock ₹1,80,000. Find the inventory turnover ratio and the days of inventory holding, and comment.

Show the solution
  1. Material consumed = 1,20,000 + 7,80,000 − 1,80,000 = ₹7,20,000.
  2. Average stock = (1,20,000 + 1,80,000) ÷ 2 = ₹1,50,000.
  3. Inventory turnover ratio = 7,20,000 ÷ 1,50,000 = 4.8 times.
  4. Days of holding = 365 ÷ 4.8 = 76.04 days, about 76 days.
  5. Comment: stock is used up 4.8 times a year and is held for about 76 days on average. Compare this with the industry norm or the previous year. If the figure is higher than the norm, stock may be slow-moving.

Answer: Turnover ratio is 4.8 times and holding period is about 76 days.

Exam tips

  • In valuation problems, always show cost and NRV for each item. Even if you pick the wrong one, you earn marks for the working.
  • Read every cost carefully and classify it as included or excluded. Questions often hide recoverable taxes, abnormal losses and selling costs in the data.
  • State the average-stock assumption when only closing stock is given.
  • For MCQs, one or two lines of arithmetic is enough. Check whether the question asks for ratio in times or in days.
  • When asked to comment, say what the ratio means and name one action, such as clearing slow-moving stock or reviewing reorder levels.

Practice questions from Material Cost

Valuation of Inventory and Inventory Turnover in other exams

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

Valuation of Inventory and Inventory Turnover: frequently asked questions

Why is inventory valued at lower of cost and NRV?

This stops assets from being shown above the amount you can expect to recover. If NRV falls below cost, the loss is recognised in the period the fall occurs. Gains are not recognised before sale.

What is the difference between slow-moving and non-moving inventory?

Slow-moving items are issued, but at a low rate compared with the stock held. Non-moving items have had no issue for a long period. Both lock up funds, and non-moving items carry a higher risk of obsolescence.

Is storage cost part of inventory cost?

Generally no. Storage costs are excluded unless they are necessary in the production process before a further stage of production. Selling and general administration costs are also excluded.

Which cost figure should I use in the inventory turnover ratio?

For materials, use the cost of material consumed. For finished goods, use cost of goods sold. Divide by average stock, and use closing stock only if opening stock is not given.