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CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory

Malabar Spices Ltd. holds 4,000 kg of raw pepper bought at ₹200 per kg, total cost ₹8,00,000. At the year end the replacement cost of pepper fell to ₹162.50 per kg (₹6,50,000 in total). The pepper will be used in spice blends, and the finished blends are expected to sell at or above their cost. At what amount should the raw pepper be shown at the year end under AS 2?

The raw pepper should be shown at its cost of ₹8,00,000. AS 2 does not permit writing down raw materials held for production when the finished goods they will become are expected to sell at or above cost, even if the materials' replacement price has fallen.

  1. A₹6,50,000
  2. B₹7,25,000
  3. C₹1,50,000
  4. D₹8,00,000Correct

Explanation

AS 2 says materials held for use in production are not written down below cost if the finished products they go into are expected to sell at or above cost. Here the blends will sell at or above cost, so no write-down is needed and pepper stays at cost of 8,00,000. Using replacement cost (6,50,000) is the common error; 1,50,000 is merely the fall in price.

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