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CA Foundation · Accounting · Inventories

Under AS 2 (Valuation of Inventories), the standard cost method may be used to measure the cost of inventories for convenience, provided that:

The standard cost method is acceptable under AS 2 when standards reflect normal levels of consumption, efficiency and capacity utilisation and are regularly reviewed and revised. This ensures the results approximate actual cost. Ideal or never-revised standards would not approximate cost and so are not permitted.

  1. AStandard costs are fixed at the start of the year and are not changed during the year
  2. BStandard costs take into account normal levels of consumption, efficiency and capacity utilisation, and are regularly reviewed and revised where necessaryCorrect
  3. CStandard costs are based on ideal conditions in which there is no wastage or idle time
  4. DStandard costs differ materially from actual costs so that the variance is clearly visible

Explanation

AS 2 allows standard costs only if the results approximate actual cost. For this, they must reflect normal consumption of materials, labour, efficiency and capacity utilisation, and be reviewed regularly against current conditions. Fixed or ideal-condition standards would not approximate cost, so those options are wrong.

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