Determine the value of stock to be taken to the Balance sheet of
Bharat Tulsian Ltd. as at 31 March 2001 from the following
information:
The stock was physically verified on 24 March and was valued at
Rs. 400000. After stock taking the following transaction had
taken place till 31 March
a. Purchases Rs. 200000 out of which 20% goods were
returned.
b. Sales of Rs. 200000 out of which 20% goods were
returned by the customer.
Goods are sold by the trader at a profit of 25% on Cost.
Answers
Answer:Inventories are assets:
Held for sale in the ordinary course of business, or
In the process of production for such sale, or
In the form of materials or supplies to be consumed in the production process or in the rendering of services.
Inventories encompass goods purchased and held for resale, for example, merchandise purchased by retailer and held for resale, computer software held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work in progress being produced, by the enterprise and include materials, maintenance suppliers, consumables and loose tools awaiting use in the production process. Inventories do not include machinery spares which can be used only in connection with an item of fixed asset and whose use is expected to be irregular, such machinery spares are accounted for in accordance with Accounting StanTo determine true income, and
To determine true financial position.
MEANING OF COST FOR INVENTORY VALUATION
For inventory valuation, cost may mean historical, current (replacement) or standard cost. Historical cost represents the cost actually incurred at the date of acquisition. Current replacement cost represents the replacement price on the date of its consumption. Standard cost represents the predetermined cost that should be incurred at a given level of efficiency and capacity utilization. But with regard to the objectivity, verifiability and effectiveness in line with the realisation concept, the historical cost basis is almost universally accepted and used. Historical cost represents an appropriate combination of:
the cost of purchase;
the cost of conversion; and
the other costs incurred in the normal course of business in bringing the inventories upto their present location and condition.
Now, the us discuss the meaning of Cost of Purchase, Cost of Conversion and other Costs.
Cost of Purchase ‘Cost of Purchase’ consists of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to acquisition, less trade discounts, rebates, duty drawbacks and subsidies in the year in which they are accounted, whether immediate or deferred, in respect of such purchase.
Cost of Conversion ‘Cost of Conversion’ consists of:
Costs which are specifically attributable to units of production i.e., direct labour, direct expenses and sub-contracted work; and
Production overheads, ascertained in accordance with adsorption costing method, Production overheads exclude expenses which relate to general administration, finance, selling and distribution.
Now, let us know the meaning of Fixed Overheads, Variable Overheads and Absorption Costing Method.
Fixed Overheads Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and the cost of factory management and administration.
Variable Overheads Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour.
Absorption of Production Overheads The allocation of fixed production overheads for the purpose of their inclusion in the costs of conversion is based on the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on an average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Variable overheads are assigned to each unit of production on the basis of actual use of the production facilities.
Other Costs Costs other than production overheads are sometimes incurred in bringing inventories to their present location and condition, for example, expenditure incurred in designing products for specific customers. On the other hand, selling and distribution expenses, general administration overheads, research and development costs and interest are usually considered not to relate to putting the inventories in their present location and condition. They are, therefore, excluded from determining the valuation of inventories.
EXCLUSIONS FROM THE COST OF INVENTORIES
In determining the cost of inventories in accordance with previous paragraphs, it is appropriate to exclude certain costs and recognise them as expenses in the period in which they are incurred. Examples of such costs are:
abnormal amounts of wasted materials, labour, or other production costs;
storage costs, unless those costs are necessary in the production process prior to a further production stage;