Question

5. Raw materials inventory of a company includes certain material purchased at Rs.100 per kg. The price on
the material is on decline and replacement of the inventory at the year and is Rs.75 per ke It is
possible to convert the material into finished product at conversion cost of Rs.125. Decide whether to
make the product or not to make the product, if selling price is
(D) R175 and
(w),225 Also find out healue of inventory in each ease.​

Answer 1

Answer:

 materials and other supplies 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. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realizable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realizable value.

 i.            When selling price is Rs.175

 Incremental Profit = Rs.175 – Rs.125

= Rs.50

Current price of the material = Rs.75

Therefore, it is better not to make the product. Raw material inventory would be valued at net realisable value i.e. Rs. 75 because the selling price of the finished product is less than Rs.225 (100+125) per kg.

ii.             When selling price is Rs.225

Incremental Profit = Rs.225 – Rs.125 = Rs.100

Current price of the raw material = Rs.75.

Therefore, it is better to make the product.

Raw material inventory would be valued at Rs.100 per kg because the selling price of the finished product is not less than Rs.225.

Explanation:

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