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CA Final · Financial Reporting · Ind AS 2 Inventories

Vardhan Motors Ltd holds 2,000 units of a component at year end at a cost of ₹600 per unit. The component is used in assembling vehicles which are expected to sell at above cost. Current replacement cost of the component is ₹520 per unit, and its net realisable value if sold as-is would be ₹480 per unit. How should the inventory be measured at the year end?

The inventory stays at cost, ₹12,00,000 (2,000 × ₹600). Materials held for production are not written down below cost when the finished vehicles are expected to sell at or above cost, so the lower replacement cost or standalone net realisable value of the component is not applied.

  1. A₹12,00,000, as the finished vehicles are expected to be sold at above cost, so the component is not written downCorrect
  2. B₹10,40,000, being replacement cost
  3. C₹9,60,000, being net realisable value of the component as sold
  4. D₹10,80,000, being the average of cost and net realisable value

Explanation

Materials held for use in production are not written down below cost if the finished products in which they will be incorporated are expected to sell at or above cost. Here the vehicles are expected to sell above cost, so the component stays at cost: 2,000 × 600 = ₹12,00,000. Replacement cost is relevant only when a price decline indicates finished goods cost will exceed NRV, which is not the case. Writing down to NRV of the component (₹9,60,000) is wrong since it ignores the finished product.

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