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CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory

Bharat Steel Ltd. has a raw material item whose cost is Rs 80 per kg; 1,000 kg are in stock. The finished product made from it is expected to sell at more than its cost, so the finished goods are not written down. The current replacement cost of the raw material is Rs 70 per kg. Under AS 2, at what value should the 1,000 kg of raw material be carried?

The raw material is carried at Rs 80,000, its cost. AS 2 says materials held for production are not written down below cost when the finished products they go into are expected to sell at or above cost, so replacement cost of Rs 70 per kg is ignored.

  1. ARs 70,000
  2. BRs 75,000
  3. CRs 80,000Correct
  4. DRs 90,000

Explanation

AS 2 states that materials held for use in production are not written down below cost if the finished products in which they will be incorporated are expected to sell at or above cost. Hence the stock stays at cost: 1,000 x 80 = Rs 80,000. Writing down to replacement cost (Rs 70,000) would be wrong because the finished goods are not impaired.

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