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CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory

Kapoor Engineering Ltd. values closing stock of a raw material at cost. Finished goods made from it are expected to sell above cost. At year end, the material's replacement cost has fallen to Rs 90 per kg against a cost of Rs 100 per kg, for 4,000 kg. Finished goods incorporating it are expected to sell at or above their cost. How should the raw material be valued under AS 2?

The raw material is valued at its cost of Rs 4,00,000. AS 2 does not permit a write-down of materials held for production when the finished goods made from them are expected to sell at or above cost, even though replacement cost has fallen.

  1. AAt cost, Rs 4,00,000Correct
  2. BAt replacement cost, Rs 3,60,000
  3. CAt cost less 5%, Rs 3,80,000
  4. DAt selling price of finished goods

Explanation

AS 2 says 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 4,000 x 100 = 4,00,000. Writing down to replacement cost would apply only if the finished goods were expected to sell below cost.

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