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CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory

Arjun Pharma Ltd. uses raw material costing Rs 80 per kg (1,500 kg in stock) to make a product that sells for Rs 700 per unit; each unit uses 5 kg of material. Conversion cost is Rs 200 per unit and the finished product is expected to sell at Rs 700 less selling costs of Rs 20 per unit. Because of a price fall, the replacement cost of the raw material is Rs 70 per kg. At what value should the raw material be shown?

The raw material should be shown at Rs 1,20,000, its cost. AS 2 permits writing down materials below cost only when the finished products they go into are expected to sell below cost. Here finished product cost is Rs 600 against NRV of Rs 680, so no write-down is needed.

  1. ARs 1,05,000
  2. BRs 1,20,000Correct
  3. CRs 1,12,500
  4. DRs 1,35,000

Explanation

Finished product cost = 5 x 80 + 200 = 600 per unit. NRV = 700 - 20 = 680, which is above cost, so finished goods are not written down. Hence raw material is carried at cost: 1,500 x 80 = Rs 1,20,000. Writing down to replacement cost (Rs 1,05,000) is wrong since the finished goods will sell above cost.

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