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K.P.B. HINDUJA COLLEGE OF COMMERCE

S.Y.B.A.F.

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2012-2013COST ACCOUNTANCY

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2RUSHABH CHANDAN 28POULAMI SARKAR 22DIVYA DADHEECH 33RUTUJA CHUDNAIK 08EKTA MANIK 46DIVYA RANAWAT 27

GROUP NO - 3

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Accounting Standards

AS-2“Valuation Of Inventories”

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WHAT IS ACCOUNTING STANDARDS?

Accounting standard 2

Valuation Of Inventories

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WHAT IS INVENTORY ?WORK IN PROGRESS RAW MATERIALSFINISHED GOODS

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SCOPESCOPE

Work in progress arising under construction contracts

Work in progress arising in service provider

Financial Producers of agricultural and forest

products

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What is excluded from scope of accounting standard 2

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Measurement of InventoryMeasurement of Inventory7

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2COST OF INVENTORY=COST OF PURCHASE + COST OF

CONVERSION+OTHER COSTS

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2COST OF PURCHASE

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An enterprise ordered 13000 Kg of certain material at Rs.90/unit. The purchase price includes excise duty Rs.5 per kg ,in respect of which full CENVAT credit is admissible. Freight incurred amounted to Rs.80600. Normal transit loss is 4%. The enterprise actually received 12400Kg and consumed 10000 Kg.What is cost of inventory ?

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Purchase price (13000Kg x Rs:90)Less:CENVAT Credit (13,000 Kg. x Rs:5)

11,70,000 65,000

Add: Freight 11,05,000 80,600

A. Total material cost 11,85,600

B. Number units normally received=96% of 13,000 Kg. Kg. 12,480

C. Normal cost per Kg. 95

Cost of inventory(2,400 x 95) 2,28,000

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COST OF CONVERSION

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In the previous example suppose normal processing loss is 5% of input.During the accounting period , the enterprise has actually produced 9600 units of finished product.9300 units were sold at Rs.250 p.u. The labour and overheads costs amounted to Rs.612845 and Rs. 223440.Overheads are recovered on the basis of output. Excise duty on final product is Rs.28.50 p.u.Find cost of inventory assuming normal capacity is 9400 units.

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2Solution:-Normal recovery rate=Rs.2,23,440/9400units=Rs.23.77Actual Overheads p.u.=Rs.2,23,440/9600units=Rs.23.275Recovery rate is decreased to actual Rs.23.275 p.u. due to high production.

Materials consumedWagesOverheads(9600xRs.23.275)Excise Duty(9600xRs.28.50)Total costNormal outputNormal cost p.uCost of inventory

9,500006,12,8452,23,4402,73,60020,59,8859500units216.8365,049

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EXCLUSIONS FROM THE COST OF INVENTORIES

OTHER COSTS

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COST FORMULA

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LIFOFIFO

AVERAGE COST

SPECIAL IDENTIFICATION

METHOD

accounting standard 2

Used where items of inventory are dissimilar and not interchangeable

Feasible when inventory items are uniquely identifiable and of sufficient value to keep detailed records

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Specific IdentificationSpecific Identification

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Purchased goods

Purchased goods

Sold goods

Sold goods

Inventory Cost Flow AssumptionsInventory Cost Flow Assumptions7

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Purchased goods

Purchased goodsSold

goods

Sold goods

Inventory Cost Flow AssumptionsInventory Cost Flow Assumptions7

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Purchased goods

Purchased goods

Sold goods

Sold goods

Inventory Cost Flow AssumptionsInventory Cost Flow Assumptions7

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Techniques Of Cost MeasurementTechniques Of Cost Measurement

• STANDARD COST METHOD

• RETAIL METHOD

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Uses ratios called efficiency Standard costs take into account normal

levels of consumption of materials and supplies, labour efficiency and capacity utilization.

Developed above 100 years ago Under this method, the cost of goods

sold is calculated at the standard cost and at the end.

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STANDARD COST METHODSTANDARD COST METHOD

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Use in retail trade/ industryBasic Retailing Formula Cost of Goods + Mark up = Retail Price Retail Price - Cost of Goods = Mark up Retail Price - Mark up = Cost of Goods

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RETAIL METHODRETAIL METHOD

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Net Realizable Value =Estimated selling – Estimated cost necessary price to make sale.

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NET REALISABLE VALUENET REALISABLE VALUE

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Or When : Selling Price Of Finished > Relevant cost of finished productsGoods

Or When : (Selling Price Of – Cost To Make) > Current Price Of Material Finished GoodsOr When : (Selling Price Of – Cost To Make) > Current Price Of Material Finished Goods

INCREMENTAL REVENUE >CURRENT PRICE OFBY MAKING MATERIAL

An enterprise prefers to incorporate materials in finished products when :

An enterprise prefers to incorporate materials in finished products when :

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Current

price of

material

Material cost

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Raw material inventory of a company includes 1 Kg. of certain material purchased at Rs:100 per Kg. The price of the material is on decline and replacement cost of the inventory at the year-end is Rs:80 per Kg. It is possible to incorporate the material in a finished product. The conversion cost is Rs:120

Inventory values for expected selling prices of the finished product (a) Rs:195 and (b)Rs:230 are shown belowIn all cases, current price of material(Rs:80)is less than material cost Rs:100

Case studyCase study7

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SELLING PRICE:INCREMENTAL REVENUE:CURRENT PRICE OF MATERIALS:NET REALISABLE VALUE:COST OF MATERIAL:VALUE OF INVENTORY:

RS 195RS 75RS 80RS 80RS 100RS 80

RS 230RS 110RS 50RS110RS 100RS 100

CASE A CASE B

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Accounting policy adopted in measuring including cost formula used,

Total carrying cost of inventories and its classification.

DISCLOSUREDISCLOSURE7

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• STUDY MATERIAL IPCC ACCOUNTANCY VOL.1

• WWW.SIKACA.COM

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BIBILOGRAPHYBIBILOGRAPHY

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THANK YOU