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CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory

Narmada Traders Ltd. has 400 units of raw material costing Rs 90 each. The finished product made from it is expected to sell below cost, and the current replacement cost of the raw material is Rs 80 per unit. Under AS 2, how should the raw material be valued?

The raw material should be valued at Rs 80 per unit, the replacement cost. AS 2 permits no write-down of materials when finished goods sell at or above cost, but here finished goods are expected to sell below cost, so materials are written down to net realisable value.

  1. AAt cost Rs 90 per unit, since materials are never written down
  2. BAt replacement cost Rs 80 per unit, as a best estimate of NRVCorrect
  3. CAt selling price of the finished product
  4. DAt cost Rs 90 less the average profit margin

Explanation

AS 2 says materials held for use in production are not written down below cost if the finished products are expected to sell at or above cost. When finished goods are expected to sell below cost, the materials are written down to net realisable value, and replacement cost may be the best available measure. Hence Rs 80 per unit, i.e. Rs 32,000.

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