NRV refers to the net amount expected to realise from the sale of inventory in the ordinary
course of business. Fair value reflects the price at which it can be sold in the market in
general on the
not be equal to fair value less costs to sell.
The significance of valuation of inventories are as follows:-
➔ To value the inventory in accordance with its current market price
➔ To ascertain current year's profit correctly
storage cost (unless those costs are necessary in the
production process before a further production stage),
Trade discount is referred to as the discount that is offered by a seller to the buyer of the
product in the form of reduction in the price of the [Link] example, a supplier may offer a
10% trade discount to customers who purchase 100 units of a product or service. This
means the customer will pay only 90% of the list price for each unit.
The administrative overhead includes all the expenses that are not linked to the specific
business function. The administrative expenses include wages & salaries to the office staff,
audit and legal expenses, consultancy fees, rent, insurance premiums paid, utility expenses.
It mainly includes cost of production, cost of conversion and other cost which is incurred in
Other Costs included in the cost of inventories are those costs which are incurred in bringing the inventories to their
present location and condition.
However, Interest and other borrowing costs are usually considered as not relating to bringing the inventories to their present
location and condition and are, therefore,
usually not included in the cost of inventories.
The FIFO formula assumes that the items of inventory that were purchased or produced first are sold first, and consequently the
items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average
cost formula, 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.
This method of material pricing determines the value of inventory considering both the prices of materials and the quantities of
such materials acquired. The average may be calculated on a periodic basis, or as each additional shipment is received, depending
upon the circumstances of the entity.
In this method, materials received last in the store are to be issued first to the production process. The price at which the materials
is received prior to the last materials, second materials are to be issued from store at that price and so on.
CARRYING AMT is the amt at whcih an asset is recognised after deducting any accumulated dep or losses
carrying amt = acquistion cost - accumulaued dep
• Cost of Conversion Cost of conversion includes all cost incurred during the production process to complete the raw materials into
finished goods. Cost of conversion also includes a systematic allocation of fixed and variable overheads incurred by the enterprise
during the production process.
• Following are the categories of conversion cost:
• I. Direct Cost
• All the cost directly related to the unit of production such as direct labor
• II. Fixed Overhead Cost
• Fixed overheads are those indirect costs which are incurred by the enterprise irrespective of production volume. These are the
cost that remains relatively constant regardless of the volume of production, such as depreciation, building maintenance cost,
• [Link]
• administration cost etc.
• The allocation of fixed production overheads is based on the normal capacity of the production facilities. In case of low production or idle plant allocation of
these fixed overheads are not increased consequently.
• III. Variable Overhead Cost
• Variable overheads are those indirect costs of production that vary directly with the volume of production. These are the cost that will be incurred based on the
actual production volume such as packing materials and indirect labor.
• D. Other Cost
• All the other cost which are incurred in bringing the inventories to the current location and condition. For (eg) design cost which is incurred for the specific
customer order. If there are by-products during the production of main products, their cost has to be separately identified. If they are not separately
identifiable, then allocation can be made on the relative sale value of the main product and the by-product. Some of the cost which should not be included are:
• a. Cost of any abnormal waste materials cost
• b. Selling and distribution cost unless those costs are necessary for the production process
• c. A normal loss which occurs during the production process is apportioned over the remaining no of units and abnormal loss is treated as an expense
• (Refer Case studies given at the end of the article)
Cost is defined as the value of money that has been used to produce something or deliver a service. Cost
can be calculated using various cost techniques.