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Check our Cookie Policy for more details. Topics discussed in this article: In this article, we cover the following topics:. This Standard should be applied in accounting for all inventories except the following : a work in progress in the construction business, including directly related service contracts b work in progress of service business consulting, banking etc c shares, debentures and other financial instruments held as stock in trade d Inventories like livestock, agricultural and forest products, mineral oils etc These inventories are valued at net realizable value.
Raw materials which are consumed during production process or rendering of services including consumable stores item. Inventories should be valued at lower cost and net realizable value. Following are the steps for valuation of inventories: A. Determine the cost of inventories B. Determine the net realizable value of inventories C. On Comparison between the cost and net realizable value, the lower of the two is considered as the value of inventory.
A comparison can be made the item by item or by the group of items. Refer Case studies given at the end of the article. Cost of Purchase While determining the purchase cost, the following should be considered:.
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. 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, 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. 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. All the other cost which are incurred in bringing the inventories to the current location and condition. See example:. At the end of your financial year, when you produce a report dated in the new year, the values are automatically cleared from the opening and closing stock nominal accounts to the profit and loss account, You'll see this value in the Equity section of the Balance Sheet Report, leaving your unsold stock as an asset on nominal ledger account Follow the steps in the Start of month 1 or your financial year section to start posting opening and closing stock for the new year.
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