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Exclusion from Cost of Inventory

  • Abnormal amounts of wasted materials, labour or other production costs.
  • Storage costs, unless those costs are necessary in the production process prior to the further production stage.
  • Administration costs
  • Selling and Distribution costs.

Requirement of Accounting Standard 2 on valuation of inventories

  • Inventories should be valued either at cost or net realizable value, whichever is lower.
  • Cost of inventories should comprise all costs incurred for bringing inventories to their present location and condition.
  • Net realizable value is the estimated selling price less estimated cost of completion and estimated cost necessary to make the sale.
  • Specific identification method should be used where the goods are not ordinarily interchangeable or have been segregated for specific projects.
  • Weighted average cost or FIFO method is to be used in cases where the goods are ordinarily interchangeable.
  • Disclose the accounting policies adopted. It includes the cost formula used, total carrying amount of inventories and its classification.

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