Skip to content

CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory

Ravi Engineering Ltd. produced 10,000 units in a year against normal capacity of 12,500 units. Fixed production overheads were Rs 2,50,000, variable production overheads Rs 3,00,000, direct material Rs 6,00,000 and direct labour Rs 1,50,000. Closing stock is 2,000 units and there was no opening stock. What is the value of closing stock at cost under AS 2?

Closing stock is Rs 2,50,000. Fixed overheads are absorbed on normal capacity, so Rs 2,50,000 divided by 12,500 units is Rs 20 per unit. Adding material Rs 60, labour Rs 15 and variable overhead Rs 30 gives Rs 125 per unit, and 2,000 units give Rs 2,50,000.

  1. ARs 2,60,000Correct
  2. BRs 2,50,000
  3. CRs 2,40,000
  4. DRs 2,30,000

Explanation

Fixed overhead absorbed per unit is based on normal capacity: 2,50,000/12,500 = Rs 20. Variable overhead per unit = 3,00,000/10,000 = Rs 30. Material 60, labour 15. Cost per unit = 60+15+30+20 = Rs 125. Closing stock = 2,000 x 125 = Rs 2,50,000. Using actual output for fixed overhead gives 25 per unit and Rs 2,60,000, which is wrong.

Did you get it right without looking?

One question tells you little. A timed set on AS 2 Valuation of Inventory shows your real accuracy, how long you take and where you lose marks.

Practise AS 2 Valuation of InventoryFree diagnostic mock

More AS 2 Valuation of Inventory questions