Measurement of Inventories - Ind AS - Indian Accounting Standards - Companies Law

Measurement of Inventories Inventory is valued at COST or NRV , whichever is LOWER Let s understand the concept of What is COST? Items to be included/excluded from the cost? Methods of Valuation of Inventory? Cost of Inventory Includes, Cost of Purchase Cost of Conversion Other costs incurred to bring the inventory to present location and condition. Cost of Purchase Cost of purchase includes all the costs incurred to purchase the material. The following items are directly related to the purchase of material: ₹ Purchase Price i.e., Basic Price of Material XXX Add: Non-Refundable taxes duties like customs duty XXX Carrying Cost e.g., inward freight cost XXX Inward Insurance Cost XXX All other costs incurred directly related to acquisition and bringing it to warehouse XXX Less: Trade discounts (XXX) Quantity discounts (XXX) Duty drawbacks other similar items (XXX) Cost of purchase XXX Cost of Conversion This includes the costs incurred to convert the raw materials into finished goods like labour, factory rent, fuel costs, power expenses, factory maintenance (factory overheads) and other items. Allocation of Cost - They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings, equipment and right-of-use assets used in the production process, and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour. Other Costs Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include non-production overheads or the costs of designing products for specific customers in the cost of inventories. Examples of costs excluded from the cost of inventories and recognised as expenses in the period in which they are incurred are: abnormal amounts of wasted materials, labour or other production costs; storage costs, unless those costs are necessary in the production process before a further production stage; administrative overheads that do not contribute to bringing inventories to their present location and condition; and selling costs. Interest Financial Charges In general, borrowing costs are not related to bring the inventory to its present location and condition. However, Ind AS 23, Borrowing Costs, identifies limited circumstances where borrowing costs are included in the cost of inventories. An entity may purchase inventories on deferred settlement terms. When the arrangement effectively contains a financing element, that element, for example a difference between the purchase price for normal credit terms and the amount paid, is recognised as interest expense over the period of the financing.