CA Foundation · Accounting · Inventories
Mehta Foods processes a main product and a by-product. Total joint processing cost is ₹5,00,000. The by-product is immaterial in value and can be sold for a net realisable value of ₹20,000. How is the cost of the main product determined under AS 2?
The main product's cost is ₹4,80,000. Where by-products are immaterial, AS 2 permits measuring them at net realisable value and deducting that amount, here ₹20,000, from the joint conversion cost of ₹5,00,000 to arrive at the main product's cost.
- A₹5,00,000, since by-products carry no cost
- B₹4,80,000, by deducting the by-product's NRV from the joint costCorrect
- C₹5,20,000, by adding the by-product's NRV to the joint cost
- D₹2,50,000, by dividing the joint cost equally between the two products
Explanation
AS 2 states that when by-products are immaterial, they are often measured at net realisable value and this value is deducted from the cost of the main product. The main product's cost is therefore 5,00,000 - 20,000 = ₹4,80,000. Equal division has no basis in AS 2.
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