CAF-03 Inventory valuation

Chapter 1 Inventory valuation

1.1 Inventory and its types
Inventory can be defined as the assets which are:
(i) in the form of materials or supplies to be used in the production process or rendering of services; or
(ii) in the process of production; or
(iii) held for sale in the ordinary course of business.
Types of inventories
There are three main types of inventories:
(i) Raw materials
In a manufacturing business, components, parts and supplies are held in factory storeroom for use
in manufacturing finished goods.
They are treated as expense when these are issued to production whereas those raw materials that
still exist, at the end of the reporting period are treated as current assets and are termed as
inventories.
Examples
Wood is a raw material for furniture, leather is a raw material for leather jackets, crude oil is a raw
material for petrol, milk is a raw material for yogurt, and yarn is a raw material for garment.
(ii) Work-in-process (WIP)
In manufacturing business, sometimes in factory, finished goods are partly complete at the end of
period. These incomplete finished goods are known as work in process inventory.
(iii) Finished goods
In a manufacturing business, these are the final products which have been completed and stored in
warehouse for sale to customers, while in trading business, these are ready made goods purchased
from supplier for resale purpose.
(iv) Stores, spares and loose tools
Stores, spares and loose tools are used in the equipment and machinery and are kept in inventory
so that in case of any damage to the machinery or equipment, the production should not stop and
necessary tools are available in stock to resume the production at earliest. The unused stores,
spares and loose tools at period end is treated as inventory while used stores, spares and loose
tools is charged as expense in financial statements.

1.2 Material handling procedure and related documentations

Materials are the basic components of manufacturing and production process in a goods manufacturing
entity. Materials are also called raw materials which are used in the production of a finished products.
In some manufacturing processes, raw material cost is major part of its total production cost and any
loss of control over material may cause significant increase in production cost. It is, therefore,
important for any entity to control the material activities from purchase till its use.
An entity that purchases materials to be used in its production or further sale, must ensure that proper
procedures are in place to enable the controls over their costs, purchase quantity, quality as well as
usage quantity.
In order to make the controls effective, their documentation is necessary so that verifiable records can
be maintained.
The procedure of purchasing, storing and issuing the raw materials to the production department and
related documents is explained below:
1. Production department requests material from storeroom for use in production through material
requisition.
2. Storekeeper issues raw material to production department through material issue note.
3. Excess material is returned from production department to storeroom and material return note is
issued.
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4. If required material of production department is not available in storeroom then written request,
known as purchase requisition, is sent to purchase department for purchase of material.
5. Purchase department places order to supplier through purchase order form and its copies are sent
to receiving department and accounts department
6. Supplier delivers the required material to receiving department with delivery note.
7. Receiving departments compare the material against purchase order for its quantity, quality and
physical material is sent to storeroom. After inspection, receiving department issues Goods
received note (GRN) to Accounts department with purchase invoice.
8. Accounts department makes payment to supplier on due date and this purchase order is closed after
payment.

1.3 Functions of storekeeper

1. Storekeeper has to perform four basic functions including receiving of goods, storing of goods,
issuing of goods and recording the inventory movements.
2. Whenever goods are received, it is the basic responsibility of storekeeper to check that goods are
not damaged and are in accordance with the specification provided in the purchase order.
3. Another important function of storekeeper is to store goods properly and to issue the goods / raw
materials to relevant department against properly authorized purchase requisition.
4. All the transactions of receiving and issuing must be recorded by storekeeper; normally bin card is
maintained for each raw material item.

1.4 Systems of recording inventories in the books of accounts

There are two systems of recording inventories in the books of accounts:
1) Perpetual inventory system
Under perpetual inventory system, stock ledger is maintained and every movement in inventory is
tracked continuously and recorded at the date of occurrence. Due to this timely inventory
accounting, the balance of inventory at any point in time is readily available. Perpetual inventory
system is used by organisations where inventory items are expensive and volume of daily inventory
related transactions is very high. Under this system, two main ledger accounts are prepared:
Inventory account
Every increase due to purchases will be recorded on debit side of inventory account and every
decrease will be recorded on credit side of inventory account so the remaining balancing figure will
be the ending inventory. There will be no journal entry for beginning inventory and ending
inventory.
Cost of sales account
Cost of sales account shows the cost of goods sold and its balance will be readily available at any
point in time during the period.
Under perpetual inventory system, physical inventory count is performed on regular basis to match
physical inventory balance and inventory account balance.
Perpetual inventory system has following advantages:
(i) This updated recording system protects inventory from theft or any other loss.
(ii) Inventory levels can be observed and it can be determined at any point in time.
(iii) It helps in frequent physical stock taking.
(iv) It serves as a moral check on employees managing inventory
Format of inventory card
Receipts Issues Balance
Date
Quantity Rate Amount Quantity Rate Amount Quantity Rate Amount

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2) Periodic inventory system
Under perpetual inventory system, purchases will be recorded in purchases account and period end
inventory is determined by physical count.
Under this system, two ledger accounts are maintained:
Purchase account
Purchase account is used to record all purchases made during the period. At the end of accounting
period, purchase account is closed to cost of sales account.
Inventory account
Inventory account is used to record value of inventory at the beginning/end of period. Under
periodic inventory system, physical inventory count is performed at the end of accounting period so
ending balance of inventory will be available after such physical count. At the end of every
accounting period, journal entries are passed to record ending inventory and beginning inventory.
Note: In manufacturing businesses, mostly perpetual inventory system is used whereas in trading
concerns periodic inventory system is used.

1.5 Cost of inventories

The following table explains the cost of each type of inventory:
Inventory Cost
Raw material Purchase price including import duties & taxes (other than those
subsequently recoverable by the entity), transport, handling and other cost
directly attributable to the purchase of goods. Trade discounts, rebates and
other similar items are deducted in determining the cost. (IAS 2)
Work-in-process Cost of raw material as determined above, plus direct labour cost and
production overhead costs to the extent of work done.
Finished goods Cost of raw material as determined above, plus direct labour cost and
production overheads.
Stores, spares and loose Same as raw material.
tools
Sometimes, the inventories are damaged or become wholly or partly obsolete. In such a case, the
company
▪ Either have to incur more cost to bring them into saleable condition due to which the cost may
exceed the selling price; or
▪ Sell them in the damaged or obsoleted form for which the selling price would probably be lower
than the actual cost as demand of such obsoleted product may have come down
In such cases, the company needs to bring the inventories at their net realizable value.

1.6 Net realizable value

According to IAS-2, NRV is the net amount that an entity expects to realize from the sale of the
inventory in the ordinary course of business (IAS 2). It can be computed as follows:
Rs.
Estimated selling price ×
Less: Estimated cost of completion (×)
Less: Estimated repair cost of damaged units (×)
Less: Estimated selling cost (×)
×

1.7 Valuation of inventory

An entity is required to evaluate, at the end of each reporting period, the net realizable value of its
inventories and value the inventories at lower of:
▪ Cost or
▪ Net realizable value
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The cost of the inventories is ordinarily lower than the net realizable value. Therefore, the inventories are
carried at their costs. However, the cost may exceed the net realizable value in the following cases:
▪ The inventories are damaged,
▪ The inventories have become wholly or partially obsolete,
▪ The selling price of the inventories have declined, or
▪ The estimated cost of completion or estimated cost to be incurred to make the sale have increased
(IAS 2).

1.8 Cost formulas for assigning cost to inventory (Inventory valuation methods)
For all inventory items, particularly large and expensive items, it might be possible to recognize the
actual cost of each item.
In practice, however, this is unusual because the task of identifying the actual cost for all inventory
items is impossible because of the large numbers of such items and when the prices of those items
differ in different periods.
The historical cost of inventory is usually measured by one of the following methods:
▪ First in, first out (FIFO)
▪ Weighted average cost (AVCO)
The FIFO and weighted average cost (AVCO) methods of inventory valuation are used within perpetual
inventory systems. They can also be used to establish a cost for closing inventory with the period-end
inventory system.

First in first out (FIFO) method

With the first-in, first-out method of inventory valuation, cost of inventory consumed is strictly based in
the order of purchase means first purchase is issued first and so on. In simple words, the first items that
are received into inventory are the first items that go out.
To establish the cost of inventory using FIFO, it is necessary to keep a record of:
▪ The date that units of inventory are received into inventory, the number of units received and their
purchase price (or manufacturing cost)
▪ the date that units are issued from inventory and the number of units issued.
With this information, it is possible to put a cost to the inventory that is issued (sold or used) and to
identify the cost of the items still remaining in inventory.
Since it is assumed that the first items received into inventory are the first units that are used, it follows
that the value of inventory at any time should be the cost of the most recently-acquired units of
inventory.
FIFO method is normally used when:
▪ inventory items are perishable in nature
▪ the size of inventory items and its costs are large;
▪ inventories are easily identified as belonging to a particular purchased (produced) batch.

Weighted average cost (AVCO) method

With the weighted average cost (AVCO) method of inventory valuation it is assumed that all units are
issued at the current weighted average cost per unit.
The normal method of measuring average cost is the perpetual basis method. With the perpetual basis
AVCO method, a new average cost is calculated whenever more items are purchased and received into
store. It is also termed as running weighted average method, as at new purchase with different price will
change the average cost of inventory. The weighted average cost is calculated by using the following
formula:
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑐𝑢𝑟𝑟𝑒𝑛𝑡𝑙𝑦 𝑖𝑛 𝑠𝑡𝑜𝑟𝑒 + 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑛𝑒𝑤 𝑖𝑡𝑒𝑚𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝐴𝑣𝑒𝑡𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑐𝑢𝑟𝑟𝑒𝑛𝑡𝑙𝑦 𝑖𝑛 𝑠𝑡𝑜𝑟𝑒 + 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑛𝑒𝑤 𝑢𝑛𝑖𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑
AVCO method is normally used when the material items are small and identical.

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1.9 Comparison of FIFO and AVCO methods of valuation
The valuation of closing inventory is higher and the cost of goods sold (issued) is lower using FIFO.
This is typical during a period when prices are rising steadily.
The opposite is true when prices are falling. The valuation of closing inventory is lower and the cost of
goods issued is higher using FIFO.

1.10 Advantages and disadvantages of FIFO method

Advantages
i) This method is realistic and in line with the physical movement of goods normally.
ii) Easy to understand and explain to managers.
iii) Gives a value near to replacement cost.
Disadvantages
i) Can be cumbersome to operate especially when frequent purchase is made and prices are fluctuating
on regular basis
ii) Managers may find it difficult to compare costs and make decisions when they are charged with
varying prices for the same materials
In a period of high inflation, inventory issue prices will lag behind current market value.

1.11 Advantages and disadvantages of AVCO

Advantages
i) Smoothens out price fluctuations as different prices are converted into average prices.
ii) Easier to administer than FIFO.
Disadvantages
i) Issue price is rarely what has been paid.
ii) Prices tend to lag a little behind current market values when there is gradual inflation.

1.12 Journal entries

Trading business – Finished goods inventory
Transactions Journal entries Debit Credit
FG inventory X
1 Purchase of finished goods
Creditors / cash X
Purchase return of finished Creditors / cash X
2
goods FG inventory X
Debtor / cash X
Sales X
3 Sale of finished goods
Cost of sales X
FG inventory X
Sales return X
Sale return of finished Debtor / cash X
4
goods FG inventory X
Cost of sales X
Cash X
Defective units sold as
5 P/L (Bal.) X
scrap
FG inventory X
Cost of sales X
6 NRV loss
FG inventory X
Shortage in physical stock / P/L X
7
theft of FG inventory FG inventory X
FG inventory X
8 Surplus in physical stock
P/L X

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Manufacturing business – Raw material inventory
Transactions Journal entries Debit Credit
RM inventory X
1 Purchase of raw material
Creditor / cash X
Purchase return of raw Creditor / cash X
2
material RM inventory X
WIP inventory (direct material) X
Raw material issued to
3 FOH (indirect material) X
production
RM inventory X
RM inventory X
Raw material returned from
4 WIP inventory (direct material) X
production
FOH (indirect material) X
Cash X
Defective material sold as
5 FOH (Bal.) X
scrap
RM inventory X
FOH X
6 NRV loss
RM inventory X
Shortage in physical stock / FOH X
7
theft of RM inventory RM inventory X
RM inventory X
8 Surplus in physical stock
FOH X

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QUESTIONS
Question-1
Ahmad traders started its operations on February 1, 2022. During first year of its operations 60,000 units
were imported from China in single lot incurring following expenses:
Rs.
Purchase price (subject to trade discount of 10%) 1,200,000
Import duties 72,000
L/C charges 48,000
Insurance in transit 24,000
Clearence charges 120,000
Refundable taxes 160,000
Octroi / freight charges 240,000
Transportation to godown 36,000
Godown rent (per month) 50,000
Fire and theft insurance 20,000
At the end of first (i.e., 31 December 2022), out of this lot 5,600 units are still in inventory.
Required:
Total cost of closing inventory as at 31 December 2022.

Question-2
Following are the transactions relating to Babar Azam trading corporation for the month of October 2023:
Date Description units Rate
01-10-23 Opening stock 200 50
04-10-23 Purchases 600 55
09-10-23 Sales 350
14-10-23 Purchases 400 58
19-10-23 Sales 450
24-10-23 Sales 200
29-10-23 Purchases 180 62
Required:
Calculate cost of closing stock and cost of sales using:
i) FIFO (Periodic)
ii) AVCO ((Periodic)
iii) FIFO (Perpetual)
iv) AVCO (Perpetual)

Question-3
Gamma Electronics is engaged in sale of various electronic appliances for household and office use. One of
the products is Hexa-120. Following transactions relate to Hexa-120 for the month of April 2023:
Date Transaction Units Cost (Rs.)
01-04 Opening stock 200 22
02-04 Purchase 500 25
05-04 Sale 480 -
09-04 Purchase 100 28
10-04 Purchase returns (2nd April purchase) 20 -
15-04 Sale 230 -
19-04 Drawings 40 -
21-04 Sale returns:
- Out of 5th April sale 60 -
th
- Out of 15 April sale 10 -
27-04 Purchase 150 30
30-04 Goods lost by fire 10 -
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Required:
Calculate total cost of closing stock as at April 30, 2023 using:
i) FIFO (Periodic)
ii) AVCO (Periodic)
iii) FIFO (Perpetual)
iv) AVCO (Perpetual)

Question-4 (Spring 2021, Q-4)

Standard Limited (SL) is in the business of buying and selling electric ovens. It follows perpetual inventory
system and uses weighted average method for valuation of inventory. Following information is extracted
from SL’s records for the month of February 2021:
(i) Opening inventory consisted of 220,000 units having an average cost of Rs. 7,000 per unit
(ii) 280,000 units were purchased on 5 February 2021, at Rs. 7,200 per unit.
(iii) 180,000 units were sold to Khurram Limited (KL) on 10 February 2021.
(iv) 5,000 defective units were returned by KL on 12 February 2021.
(v) 30% of the defective units returned to SL, had a manufacturing fault and were returned to the supplier
on 15 February 2021. Remaining defective units were damaged due to mishandling at the warehouse.
These units were disposed of as scrap on 20 February 2021 for Rs. 2,000 per unit.
(vi) 5,000 units were sent to KL on 22 February 2021 in replacement of the defective units returned.
(vii) 150,000 units were sold on 25 February 2021.
On 28 February 2021, a physical stock count was carried out and the following was discovered:
▪ 4,500 units were identified as obsolete having net realizable value of Rs. 6,000 per unit.
▪ 500 units were found missing.
Required:
Prepare necessary journal entries to record the above transactions relating to inventory. (09)

Question-5 (Autumn 2010, Q- 2)

Quality Limited (QL) is a manufacturer of washing machines. The company uses perpetual method for
recording and weighted average method for valuation of inventory.
The following information pertains to a raw material (SRM), for the month of June 2010.
(i) Opening inventory of SRM was 100,000 units having a value of Rs. 80 per unit.
(ii) 150,000 units were purchased on June 5, at Rs. 85 per unit.
(iii) 150,000 units were issued from stores on June 6.
(iv) 5,000 defective units were returned from the production to the store on June 12.
(v) 150,000 units were purchased on June 15 at Rs. 88.10 per unit.
(vi) On June 17, 50% of the defective units were disposed off as scrap, for Rs. 20 per unit, because these
had been damaged on account of improper handling at QL.
(vii) On June 18, the remaining defective units were returned to the supplier for replacement under
warranty.
(viii) On June 19, 5,000 units were issued to production in replacement of the defective units which were
returned to store.
(ix) On June 20, the supplier delivered 2,500 units in replacement of the defective units which had been
returned by QL.
(x) 150,000 units were issued from stores on June 21.
(xi) During physical stock count carried out on June 30, 2010 it was noted that closing inventory of SRM
included 500 obsolete units having net realizable value of Rs. 30 per unit. 4,000 units were found
short.
Required:
Prepare necessary journal entries to record the above transactions. (15)

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Question-6 [Spring 2008, Q-4 (Introduction to Accounting)]
Superior Enterprises is engaged in the business of supplying four different products to four different
industries. The details relating to the movement of inventory and related expenditures are as follows:
Items Opening Bal. Quantity Invoice Import Duties Quantity Sold
Purchase Value
Qty. Value Refundable Non Qty. Value
refundable
A 30 60,000 360 810,000 120,000 90,000 350 1,015,000
B 60 90,000 780 1,560,000 200,000 150,000 800 2,080,000
C 40 120,000 560 1,820,000 250,000 200,000 580 2,320,000
D 80 200,000 600 1,650,000 - - 350 1,155,000
The following information is available:
(i) The transportation charges up to the company's godown are Rs. 100 per unit.
(ii) The transportation charges from the company's godown to the customers' premises are approximately
Rs. 150 per unit.
(iii) 25% of the closing stock of item A has been damaged due to mishandling and can only be sold at 60%
of its selling price.
(iv) A new product has been introduced by a competitor. It is similar to product C and is being marketed at
Rs. 3,200 per unit. The management of Superior Enterprises is of the opinion that in future, it will also
have to reduce the price of C to Rs. 3,500 per unit.
Required:
Compute the value of the stock as at December 31, 2007.

Question-7 (Spring 2010, Q-1)

XYZ Limited manufactures four products. The related data for the year ended December 31, 2009 is given
below:
A B C D
Opening stock:
- Units 10,000 15,000 20,000 25,000
- Cost (Rs.) 70,000 120,000 180,000 310,000
- NRV (Rs.) 75,000 110,000 180,000 300,000
Production in units 50,000 60,000 75,000 100,000
Costs of goods produced (Rs.) 400,000 600,000 825,000 1,200,000
Variable selling costs (Rs.) 60,000 80,000 90,000 100,000
Closing stock (units) 5,000 10,000 15,000 24,000
Unit cost of purchase from market (Rs.) 10.50 11.00 11.50 13.00
Selling price per unit (Rs.) 10.00 12.00 12.00 12.50
Damaged units included in closing stock 300 600 800 1,500
Unit cost to repair damaged units (Rs.) 3.00 2.00 2.50 3.50
Stock valuation method in use Weighted Weighted
FIFO FIFO
Average Average
The company estimates that in January 2010 selling expenses would increase by 10%.
Required: Compute the amount of closing stock that should be reported in the balance sheet as on
December 31, 2009. (15)

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Question-8 (Autumn 2021, Q-6)
(a) Identify any four situations under which the cost of inventories may exceed its net realisable value. (02)
(b) Orange Limited (OL) manufactures four products. The information related to its inventory of each
product for the year ended 30 June 2021 is as follows:
A B C D
Closing inventory (units) 15,000 25,000 5,000 8,000
Cost per unit using weighted average method (Rs.) 800 700 900 1,275
Retail price per unit inclusive of 10% sales tax (Rs.) 1,144 990 1,320 1,980
Variable selling cost per unit (Rs.) 80 75 100 110
Defective units (included in closing inventory) 2,400 4,000 - -
Rework cost per defective unit (Rs.) 260 320 - -
Additional information:
• During physical inventory count of Product C, a discrepancy of 900 completed units was observed.
On investigation, it was found that 5,600 units supplied to a customer were erroneously recorded as
6,500 units.
• The defective units can be sold in the market at 60% of the current retail price without incurring
any rework and selling costs.
• Due to decrease in raw material prices, the products similar to B and D, offered by the competitors,
are available in the market at a discount of 15% and 20% respectively, of OL’s current retail price.
OL would have to adjust its sales prices accordingly.
Required:
(i) Prepare entries to record the adjustments that need to be incorporated for correct valuation of
inventory. (10)
(ii) Determine the adjusted value of inventory as at 30 June 2021. (03)

Question-9 (Spring 2023, Q-7)

Asghar Ali Associates (AAA) commenced business on 1 January 2023. It manufactures two products X and
Y. Following information pertains to its activities during the month of January 2023.
(i) During the month, sales of X and Y were 11,600 units and 9,400 units respectively. Throughout the
month, AAA sold these products at 25% above cost.
(ii) Product X requires 6 kg of raw material A and product Y requires 5 kg and 3 kg of raw materials B
and C respectively.
(iii) Data relating to raw materials are as fellows:
Description A B C Total
Purchases during the period (kg) 132,000 90,000 50,000
Invoice value (Rs. in '000) 52,800 43,200 30,000 126,000
Freight-in (Rs. in '000) - - - 21,760
Transit insurance (Rs. in '000) - - - 3,780
Closing inventory (kg) 36,000 20,000 8,000 -

(iv) Product X requires 5 labour hours per unit and product Y requires 3 labour hours per unit. The cost of
labour is Rs. 300 per hour.
(v) Factory overheads during the period were Rs. 13,320,000.
(vi) Sales includes 200 units of X and 400 units of Y which were returned by the customers because of
being damaged. These are with AAA. The defective units need to be reworked by incurring a per unit
cost of Rs. 1,500 and Rs. 800 on products X and Y respectively, so they can fetch the current selling
price? "
Required:
Determine the value of closing finished goods as at 31 January 2023. (15)

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Question-10 (Autumn 2012, Q-4)
Mehanti Limited (ML) produces and markets a single product Wee. Two chemicals Bee and Gee are used in
the ratio of 60:40 for producing 1 litre of Wee. ML follows perpetual inventory system and uses weighted
average method for inventory valuation. The purchase and issue of Bee and Gee for May 2012, are as
follows:
Date Bee Gee
Receipt Issue Receipt Issue
Litre Rate Litre Litre Rate Litre
02-05-2012 - - 450 110 -
05-05-2012 - - 560 - - 650
09-05-2012 - - 300 - - 300
12-05-2012 420 52 - 700 115 -
18-05-2012 - - 250 - - 150
24-05-2012 500 55 - 250 124 -
31-05-2012 - - 500 - - 450
Following further information is also available:
(i) Opening inventory of Bee and Gee was 1,000 litres at the rate of Rs. 50 per litre and 500 litres at the
rate of Rs. 115 per litre respectively.
(ii) The physical inventories of Bee and Gee were 535 litres and 140 litres respectively. The stock check
was conducted on 01 June and 31 May 2012 for Bee and Gee respectively.
(iii) Due to contamination, 95 litres of Bee and 105 litres of Gee were excluded from the stock check.
Their net realisable values were Rs 20 and Rs. 50 per litre respectively.
(iv) 250 litres of Bee which was received on 01 June 2012 and 95 litres of Gee which was issued on 31
May 2012 after the physical count were included in the physical inventory.
(v) 150 litres of chemical Bee was held by ML on behalf of a customer, whereas 100 litres of chemical
Gee was held by one of the suppliers on ML’s behalf.
(vi) 100 litres of Bee and 200 litres of Gee were returned from the production process on 31 May and 01
June 2012 respectively.
(vii) 240 litres of chemical Bee purchased on 12th May and 150 litres of chemical Gee purchased on 24th
May 2012 were inadvertently recorded as 420 litres and 250 litres respectively.
Required:
(a) Reconcile the physical inventory balances with the balances as per book.
(b) Determine the cost of closing inventory of chemical Bee and Gee. Also compute the cost of
contaminated materials as on 31 May 2012. (15)

Question-11 (ICAP study text example 3)

A business has three items of inventory currently carried at their cost. The market prices of the inventories
have fallen down due to sudden decrease in demand. Their estimated selling prices, cost of completion and
selling costs are as under:
Cost Sales price Cost of completion Selling costs
Rs.
Finished Product A 1 8,000 7,800 - 500
Finished Product A 2 10,000 12,000 - 200
Finished Product A 3 16,000 14,000 1,500 200

Required:
Estimated the value of inventories to be reported in balance sheet.

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Question-12 (CAF-5: Spring 2018, )
Kidz Party & Co. (KPC) manufactures and sells toys. Following information is available regarding four of
its inventory items as on 31 December 2017:
Cost per unit Normal selling price per unit
Items Units
(Rs.) (Rs.)
Toy cars 10,000 1,250 1,200
Doll houses 5,000 1,800 2,700
Stuffed toys 1,850 1,200 1,900
Minion costumes 870 1,500 2,500

Following information is also available:

(i) A sales order for 3,000 toy cars @ Rs. 1,100 per unit is in hand. The remaining units can be sold at
normal selling price after incurring selling cost of Rs. 150 per unit.
(ii) Doll houses include 1,000 defective units with no scrap value. 20% of the remaining doll houses are
damaged and can be sold at 50% of cost.
(iii) Stuffed toys costing Rs. 420,000 were accidentally damaged and are beyond repair. KPC plans to
sell these toys as scrap. Proceeds from such sale are estimated at Rs. 175,000 and the sale would
require transportation cost of Rs. 6,300.
(iv) All minion costumes have manufacturing faults and can be sold in present condition at Rs. 1,350 per
unit. However, 60% of the units can be rectified at a cost of Rs. 200 per unit after which they can be
sold at Rs. 1,600 per unit.
Required
Calculate the amount at which above inventory items should be carried as on 31 December 2017 in
accordance with IAS 2 ‘Inventories’. (08)

Crescent College of Accountancy Page 12