To prescribe the accounting treatment for inventories

This Standard deals with the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value

It also deals with the cost formulas

This Standard applies to all inventories, except:

Work in progress arising under construction contracts, including directly related service contracts

Financial instruments
Biological assets

Inventories are assets:

Held for sale in the ordinary course of business In the process of production for such sale In the form of materials or supplies to be consumed in the production process or in the rendering of services

Is the estimated selling price in the ordinary course of business

less the estimated costs of completion and the estimated costs

necessary to make the sale

Refers to the net amount that an entity expects to realise from

the sale of inventory in the ordinary course of business

Net realisable value for inventories may not equal fair value less costs to sell

Is the amount for which an asset could be

exchanged, or a liability settled, between knowledgeable, willing parties in an arms length transaction

Reflects the amount for which the same inventory could be exchanged between knowledgeable and

willing buyers and sellers in the marketplace

Cost of inventories Costs of purchase Costs of conversion

Other costs Cost of inventories of a service provider Cost of agricultural produce harvested from biological assets

Comprise the purchase price, import duties and other taxes And also transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services
Trade discounts, rebates and other similar items are deducted in determining the costs of purchase

Include costs directly related to the units of production, such as direct labour

They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods

Allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities

Unallocated overheads are recognised as an expense in the period in which they are incurred In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost
Variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities

At times production process may result in more than one product being produced simultaneously When the costs of conversion of each product are not separately identifiable, they are allocated between the products on a rational and consistent basis Most by-products, by their nature, are immaterial As a result, the carrying amount of the main product is not materially different from its cost

Examples of costs excluded from the cost of inventories and recognised as expenses in the period in which they are incurred are:
(a) abnormal amounts of wasted materials, labour or other production costs (b) storage costs, unless those costs are necessary in the production process before a further production stage (c) administrative overheads that do not contribute to bringing inventories to their present location and condition (d) selling costs

service providers measure their inventories at the costs of their production

These costs consist primarily of the labour and other costs of

personnel directly engaged in providing the service, including

supervisory personnel, and attributable overheads

Labour and other costs relating to sales and general administrative personnel are not included but are recognised as expenses in the period in which they are incurred

In accordance with Ind AS 41, Agriculture, inventories comprising agricultural produce that an entity has harvested from its biological assets are measured on initial recognition at their fair value less costs to sell at the point of harvest This is the cost of the inventories at that date for application of this Standard

Standard cost method or the retail method are used Standard costs take into account normal levels of materials and supplies, labour, efficiency and capacity utilisation They are regularly reviewed and, if necessary, revised in the light of current conditions

The retail method is often used in the retail industry for measuring inventories of large numbers of rapidly changing items with similar margins for which it is impracticable to use other costing methods The cost of the inventory is determined by reducing the sales value of the inventory by the appropriate percentage gross margin

The percentage used takes into consideration inventory that has been marked down to below its original selling price
An average percentage for each retail department is often used

Specific identification
First-in, First-out (FIFO) Weighted average cost

Means that specific costs are attributed to identified items of inventory This is the appropriate treatment for items that are segregated for a specific project, regardless of whether they have been bought or produced However, specific identification of costs is inappropriate when there are large numbers of items of inventory that are ordinarily interchangeable In such circumstances, the method of selecting those items that remain in inventories could be used to obtain predetermined effects on profit or loss

The FIFO formula assumes that the items of

inventory that were purchased or produced first

are sold first

Consequently the items remaining in inventory

at the end of the period are those most recently

purchased or produced.

The cost of each item is determined from the

weighted average of the cost of similar items at the

beginning of a period and the cost of similar items

purchased or produced during the period.

The average may be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances of the entity.

The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined.

The cost of inventories may also not be recoverable if the

estimated costs of completion or the estimated costs to be incurred to make the sale have increased. The practice of writing inventories down below cost to net realisable value is consistent with the view that assets should

not be carried in excess of amounts expected to be realised

from their sale or use.

When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs

Some inventories may be allocated to other asset accounts

Inventories are usually written down to net realisable

value item by item

However, items of inventory relating to the same product line that have similar purposes or end uses, are produced and marketed in the same geographical area may be appropriate to group similar or related items.

Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made, of the amount the inventories are expected to realise.

These estimates take into consideration fluctuations of price or

cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period.

The financial statements shall disclose:

(a) The accounting policies adopted in measuring inventories, including the cost formula used (b) The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity

(c) The carrying amount of inventories carried at fair value less costs to sell
(d) The amount of inventories recognised as an expense during the period

(e) The amount of any write-down of inventories recognised as an expense in the period in accordance with paragraph 34 (f) The amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense in the period in accordance with paragraph 34 (g) The circumstances or events that led to the reversal of a writedown of inventories in accordance with paragraph 34 (h) The carrying amount of inventories pledged as security for liabilities

Finished and semi-finished products produced and purchased by the Company are carried at lower of cost and net realisable value. Workin-progress is carried at lower of cost and net realisable value. Coal, iron ore and other raw materials produced and purchased by the Company are carried at lower of cost and net realisable value.
Stores and spare parts are carried at cost. Necessary provision is made and charged to revenue in case of identified obsolete and nonmoving items. Cost of inventories is generally ascertained on the 'weighted average' basis. Work-in-progress and finished and semi-finished products are valued on full absorption cost basis.

Stores and spare parts are stated at cost or under. Stock-in-trade

is valued at cost or net realisable value, whichever is lower. The bases of determining cost for various categories of inventories are as follows: Raw and packing materials : First-in-first out

Stores and spare parts

Work-in-progress and finished

: Weighted average
: Material cost plus appropriate share goods of production overheads and excise duty, wherever applicable.

Inventories are valued after providing for obsolescence, as

follows: a) Raw Materials, Stores & Spare Parts, Packing Material and Fuels Lower of cost and net realizable value. However, materials and other items held for use in the production of inventories are

not written down below cost if the finished products in

which they will be incorporated are expected to be sold at or above cost. Cost is determined on a weighted average basis.

b) Work-in-progress and Finished goods

Lower of cost and net realizable value. Cost includes direct materials and labour and a proportion of manufacturing overheads based on normal operating capacity. Cost of finished goods includes excise duty. Cost is determined on a

weighted average basis.

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs necessary to make the sale.