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CA Intermediate · Advanced Accounting · AS 2 Valuation of Inventory

Sunrise Pharma Ltd. uses a standard costing system for valuing finished goods. Which statement about the use of standard cost in valuing inventory under AS 2 is correct?

Standard cost is acceptable when it approximates actual cost, provided it is regularly reviewed and revised in light of current conditions. AS 2 allows it as a convenience technique; it needs no ICAI approval and is neither mandatory nor prohibited.

  1. AStandard cost is acceptable only if the company has obtained prior approval from ICAI
  2. BStandard cost is acceptable if it approximates actual cost, and it must be reviewed regularly in light of current conditionsCorrect
  3. CStandard cost must always be used in preference to FIFO or weighted average
  4. DStandard cost is not permitted because only actual cost can be used

Explanation

AS 2 permits techniques such as standard cost or the retail method for convenience if the results approximate cost. Standard costs must be regularly reviewed and revised where necessary in the light of current conditions. No ICAI approval is needed and it is not mandatory over other methods.

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