IND AS 2 : INVENTORIES | CAP CLASSES

IND AS – 2 : INVENTORIES

Problem No. 1

A Ltd’s normal production volume is 50,000 units and the Fixed overheads are estimated at Rs.5,00,000. Give the treatment of Fixed Production Overheads under IND AS 2, if the actual production during a period is a) 42,000 units b) 50,000 units and c) 60,000 units.

Solution:

Statement showing inclusion of FOH in cost of inventory
Particulars	Case 1	Case 2	Case 3
Actual Prod	42,000	50,000	60,000
Normal Prod	50,000	50,000	50,000
FOH spent	5,00,000	5,00,000	5,00,000
FOH that can be included in inventory as per Ind as 2	4,20,000	5,00,000	5,00,000
	42,000*10	50,000*10	60,000*8.33
Balance unrecovered - Loss to be charged to P&L	80,000	0	0

Problem No. 2

M/s. Rama Ltd purchased goods from M/s. Krishna Ltd for Rs. 1,00,000 on credit which is payable in 2 years. Normal Credit period allowed to customers is 30 days. Prevailing interest rate for the same period is 10%. How much would be treated as cost of inventory in this case?

Give the Journal Entries for both the years.

Also show the balance of Supplier at the end of each year.

Solution:

The consideration payable to the supplier i.e., Rs.1,00,000 includes financing cost.

The cash price of inventory can be calculated by using time value of money.

100000/(1.1)² = 82,645

On the date of purchase
Inventory A/c Dr	82,645
To Krishna Ltd		82,645
At the end of first year
Finance Cost A/c (82,645*10%) Dr	8,265
To Krishna Ltd		8,265
Profit and Loss A/c Dr	8,265
To finance cost		8,265
Supplier A/c shows a liability of 82645+8265 = 90910
At the end of second year
Finance Cost A/c ((82645+8265) *10%) Dr	9,091
To Krishna Ltd		9,091
Profit and Loss A/c Dr	9,091
To finance cost		9,091
Supplier A/c shows a liability of 90910+9091 = 1,00,000
Krishna Ltd A/c Dr	1,00,000
To Bank A/c		1,00,000

Problem No. 3

In a manufacturing process of Vijoy Limited, one by-product BP emerges besides two main products MP1 and MP2 apart from scrap. Detail of cost of production process is here under:

Item	Unit	Amount (Rs.)	Output (unit)	Closing inventory as on 31-03-2017
Raw material	15,000	1,60,000	MP1-6,250	800
Wages	-	82,000	MP2- 5,000	200
Fixed overhead	-	58,000	BP-1,600	-
Variable overhead	-	40,000	-	-

Average market price of MP1 and MP2 is Rs. 80 per unit and Rs. 50 per unit respectively; by-product is sold @ Rs. 25 per unit. There is a profit of Rs. 5,000 on sale of by-product after incurring separate processing charges of Rs. 4,000 and packing charges of Rs. 6,000. Rs. 6,000 was realised from sale of scrap.

Calculate the value of closing inventory of MP1 and MP2 as on 31-03-2017.

Solution:

Step 1: Calculation of net realizable value of by-product BP

	Rs.
Selling price of by-product BP (1600*25)	40,000
Less:   Separate   processing   charges	(4,000)
Packing charges	(6,000)
Net realizable value of by-product BP	30,000

Step 2: Calculation of Net Joint Cost

Particulars	Rs.
Raw material	1,60,000
Wages	82,000
Fixed overhead	58,000
Variable overhead	40,000
Total Process Cost	3,40,000
Less: NRV of by-product BP	(30,000)
Less: Sale value of scrap	(6,000)
Joint cost to be allocated between MP1 and MP2	3,04,000

Step 3: Determination of “basis for allocation” and allocation of joint cost to MP1 and MP2

Particulars	MP1	MP2
Output in units (a)	6,250 units	5,000 units
Sales price per unit (b)	Rs. 80	Rs. 50
Sales value (a x b)	Rs. 5,00,000	Rs. 2,50,000
Ratio of allocation	2	1
Joint cost allocated in the ratio of 2:1 (c)	Rs. 2,02,667	Rs. 1,01,333
Cost per unit [c/a]	Rs. 32.43	Rs. 20.27

Step 4: Determination of value of closing inventory of MP1 and MP2

	MP1	MP2
Closing inventory in units	800 units	200 units
Cost per unit	Rs. 32.43	Rs. 20.27
Value of closing inventory	Rs. 25,944	Rs. 4,054

Problem No. 4

The company deals in three products, A, B and C, which are neither similar nor interchangeable. At the time of closing of its account for the year 2014-15, the Historical Cost and Net Realizable Value of the items of closing stock are determined as follows:

Items	Historical Cost (Rs. In Lakhs)	Net Realisable Value (Rs. In Lakhs)
A	40	28
B	32	32
C	16	24

What will be the value of closing stock?

Solution:

Items	Historical Cost  (Rs. In Lakhs)	Net Realisable Value (Rs. In Lakhs)	Value of Closing Stock (Rs. In Lakhs)
A	40	28	28
B	32	32	32
C	16	24	16
The Total Value of Closing Stock is			76

Hence, closing stock will be valued at Rs. 76 lakhs.

Problem No. 5

Sun Pharma Limited, a renowned company in the field of pharmaceuticals has the following four items in inventory: The Cost and NRV is given as follows:

Item	Cost	Net Realisable Value
A	2,000	1,900
B	5,000	5,100
C	4,400	4,550
D	3,200	2,990
Total	14,600	14,540

Determine the value of inventories:

·         On an item by item basis &

·         On a group basis

Solution

Inventories shall be measured at the lower of cost and net realisable value.

a)    Inventory Valuation (lower of Cost or NRV on Item by item basis)

Item	Cost	Net Realisable Value	Value of Inventory
A	2,000	1,900	1,900
B	5,000	5,100	5,000
C	4,400	4,550	4,400
D	3,200	2,990	2,990
Total	14,600	14,540	13,590

b)    Inventory Valuation (lower of Cost or NRV on group basis) is Rs. 14,540

 

Problem No. 6

X Co. Limited purchased goods at the cost of Rs. 40 lakhs in October, 2017. Till March, 2018, 75% of the stocks were sold. The company wants to disclose closing stock at Rs. 10 lakhs. The expected sale value is Rs. 11 lakhs and a commission at 10% on sale is payable to the agent. Advise, what is the correct closing stock to be disclosed as at 31.3.2018.

Solution:

Sl No	Particulars	Rs.	Amount Rs.
1	Cost (40,00,000*25%)		10,00,000
2	Estimated Sale value	11,00,000
3	Less: Selling Expenses	(1,10,000)
4	NRV (2-3)		9,90,000
5	Value of Inventory (Lower of 1&4		9,90,000

 

Problem No. 7

In a production process, normal waste is 5% of input. 5,000 MT of input were put in process resulting in wastage of 300 MT. Cost per MT of input is Rs. 1,000. The entire quantity of waste is on stock at the year end. State with reference to Accounting Standard, how will you value the inventories in this case?

Solution:

As per para 13 of AS 2 (Revised), abnormal amounts of wasted materials, labour and other production costs are excluded from cost of inventories and such costs are recognized as expenses in the period in which they are incurred.

In this case, normal waste is 250 MT and abnormal waste is 50 MT. The cost of 250 MT will be included in determining the cost of inventories (finished goods) at the year end.

Total Input Quantity				5000 MT
Normal Loss Percentage				5%
Normal Loss Units				250
Expected Output				4750
Actual Output				4700
Abnormal Loss				50
Abnormal Loss = Expected Production - Actual Production
Abnormal Loss = Actual Loss - Expected Loss
Calculation of Value of Inventory and Abnormal Loss
Particulars	Quantity	Rate		Amount
Inventory	4,700	1,052.63		4,947,368
Abnormal Loss	50	1,052.63		52,632
				5,000,000

 

Problem No. 8

You are required to value the inventory per kg of finished goods consisting of:

Particulars	Rs. Per KG
Direct Material Cost	200
Labour	40
Direct Variable Overhead	20

Fixed   production   charges   for   the   year   on   normal   working   capacity   of   2   lakh   kgs   is Rs. 20 lakhs.  4,000 kgs of finished goods are in stock at the year end.

 

Solution:

Fixed overheads are to be recovered based on normal production capacity

Calculation of Cost per kg. of finished goods:

Particulars	Rs. Per KG
Direct Material Cost	200
Labour	40
Variable Production Overhead	20
Fixed Production Overhead  20,00,000                                                  2,00,000	10
Total Cost per unit	270

Hence the value of 4,000 kgs of finished goods = 4,000 kgs x Rs. 270 = Rs.10,80,000

Problem No. 9

On 31^st March, 2018 a business firm finds that cost of a partly finished unit on that date is Rs. 530. The unit can be finished in 2018-19 by an additional expenditure of Rs. 310. The finished unit can be sold for Rs. 750 subject to payment of 4% brokerage on selling price. The firm seeks your advice regarding the amount at which the unfinished unit should be valued as at 31st March, 2018 for preparation of final accounts.

Answer

Valuation of unfinished unit

	Rs.
Net selling price	750
Less: Estimated cost of completion	(310)
Less: Brokerage (4% of 750)	440 (30)
Net Realisable Value	410
Cost of inventory	530
Value of inventory (Lower of cost and net realisable value)	410

Problem No. 10

Calculate the value of raw materials and closing stock based on the following information:

Raw Material X Closing Balance	500 Units
Particulars	Rs Per Unit
Cost price including GST	200
GST	10
Freight Inwards	20
Unloading Charges	10
Replacement Cost	150
Finished Goods Y - Closing Balance	1500 Units
Particulars	Rs Per Unit
Materials Consumed	220
Direct Labour	60
Direct Overhead	40

Total Fixed overhead for the year was Rs. 2,00,000 on normal capacity of 20,000 units.

Calculate the value of the closing stock, when

(i)       Net Realizable Value of the Finished Goods Y is Rs. 400.

(ii)     Net Realizable Value of the Finished Goods Y is Rs. 300.

Solution:

Cost of Raw materials
Particulars	Rs.
Purchase Cost	200
Less: GST	-10
Add: Freight	20
Unloading Charges	10
Cost per unit is	220

 

Cost of Finished Goods
Particulars	Rs.
Materials Consumed	220
Labour	60
Direct OH	40
Fixed OH (2,00,000/20,000)	10
Total Cost per unit	330

 

Situation 1: if Cost of FG is Rs. 330 and SP of FG is 400
Particulars	Valuation Basis	Cost	NRV / Rep Cost	Value p.u.	Quantity	Value of inventory
Raw Materials	Cost	220	150	220	500	1,10,000
Finished Goods	lower of Cost/NRV	330	400	330	1,200	3,96,000
			Total Value of inventory			5,06,000

Situation 2: If Cost of FG is Rs. 330 and SP of FG is Rs. 300
Particulars	Valuation Basis	Cost	NRV / Rep Cost	Value p.u.	Quantity	Value of inventory
Raw Materials	Replacement Cost	220	150	150	500	75,000
Finished Goods	lower of Cost/NRV	330	300	300	1,200	3,60,000
			Total Value of inventory			4,35,000

Problem No. 11

Capital Cables Ltd., has a normal wastage of 4% in the production process. During the year 2017-18 the Company used 12,000 MT of raw material costing Rs. 150 per MT. At the end of the year 630 MT of wastage was in stock. The accountant wants to know how this wastage is to be treated in the books. Explain in the context of Ind AS 2 the treatment of normal loss and abnormal loss and also find out the amount of abnormal loss if any.

Solution:

Abnormal amounts of wasted materials, labour and other production costs are excluded from cost of inventories and such costs are recognized as expenses in the period in which they are incurred. The normal loss will be included in determining the cost of inventories (finished goods) at the year end.

Amount of Abnormal Loss:

Material used                                      12,000 MT @ Rs.150 = Rs.18,00,000

Normal Loss (4% of 12,000 MT)             480 MT

Net quantity of material                       11,520 MT

Abnormal Loss in quantity                   150 MT

Abnormal Loss                                     Rs. 23,437.50

[150 units @ Rs. 156.25 (Rs. 18,00,000/11,520)]

Amount Rs. 23,437.50 will be charged to the Profit and Loss statement.

Problem No. 12

Mr. Mehul  gives  the  following  information  relating  to  items  forming  part  of  inventory  as  on 31-3-2018. His factory produces Product X using Raw material A.

i)     600 units of Raw material A (purchased @ Rs. 120). Replacement cost of raw material A as on 31-3-2018 is Rs. 90 per unit.

ii)   500 units of partly finished goods in the process of producing X and cost incurred till date Rs. 260 per unit. These units can be finished next year by incurring additional cost of Rs. 60 per unit.

iii) 1500 units of finished Product X and total cost incurred Rs. 320 per unit. Expected selling price of Product X is Rs. 300 per unit.

Determine how each item of inventory will be valued as on 31-3-2018. Also calculate the value of total inventory as on 31-3-2018.

          

Solution:

(i)       600 units of raw material will be written down to replacement cost as market value of finished product is less than its cost, hence valued at Rs. 90 per unit.

(ii)     500  units  of  partly  finished  goods  will  be  valued  at  240  per  unit  i.e.  lower of  cost Rs. 320 (Rs. 260 + additional cost Rs. 60) or Net estimated selling price Rs. 240 (Estimated selling price Rs. 300 per unit less additional cost of Rs. 60).

(iii)    1,500 units of finished product X will be valued at NRV of Rs. 300 per unit since it is lower than cost Rs. 320 of product X.

Valuation of Total Inventory as on 31.03.2018:

Sl No	Particulars	Quantity	Rate	Value
1	Raw Materials	600	90	54,000
2	Work In Progress	500	240	1,20,000
3	Finished Goods	1500	300	4,50,000
		Total		6,24,000