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CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory

Meenakshi Foods Ltd. has 1,000 kg of raw sugar at cost Rs 40 per kg. The finished product, sweets, made from this sugar is expected to sell at more than its cost. Replacement cost of raw sugar on the balance sheet date is Rs 34 per kg, and the NRV of the sugar itself would be Rs 35 per kg if sold as is. Under AS 2, at what value should the raw sugar be shown?

The raw sugar should be shown at Rs 40,000, its cost. AS 2 does not permit writing down materials held for production when the finished goods they go into are expected to sell at or above cost, so the lower replacement cost or NRV of the sugar is ignored.

  1. ARs 34,000
  2. BRs 35,000
  3. CRs 40,000Correct
  4. DRs 37,500

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. Here the sweets are expected to sell above cost, so sugar stays at cost: 1,000 x 40 = 40,000. Writing down to replacement cost or NRV would be wrong.

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