## AS-2 (Inventories) – Valuation of Inventory

### Core Rule

Inventory must be valued at the lower of cost and net realizable value (NRV).

### What is Included vs Excluded from Cost?

Included in Cost	Excluded from Cost
Purchase price of materials	Abnormal wastage
Freight / transport to bring inventory to its location	General and administrative overhead
Allocated production overheads	Selling costs

### Acceptable Valuation Methods

FIFO (First In, First Out)
Weighted Average Cost

> LIFO is not permitted under AS-2.

### Step-by-Step Valuation Process

1. Start with total stated cost

2. Remove abnormal wastage and other non-allocable items

3. Retain transport costs that relate to bringing inventory to its location

4. Determine NRV

5. Apply lower of adjusted cost and NRV

Worked example

### Example 1

ABC & Co. (Toy Manufacturer) – PYP May 2024

Given:

Material purchase cost: ₹25,05,000
Allocated transport cost: ₹18,000
Abnormal wastage: ₹2,000
Stated total cost: ₹25,25,000
NRV: ₹25,24,000

Step 1 – Adjust Cost:

Item	Treatment	Amount
Material purchase cost	Include	₹25,05,000
Transport cost	Include (brings inventory to location)	₹18,000
Abnormal wastage	Exclude	—
Adjusted Cost		₹25,23,000

Step 2 – Compare Cost with NRV:

Adjusted Cost = ₹25,23,000
NRV = ₹25,24,000

Step 3 – Apply Lower of Cost or NRV:

₹25,23,000 < ₹25,24,000
Inventory value to report = ₹25,23,000

Note: The original stated cost of ₹25,25,000 is wrong as it includes abnormal wastage that must be stripped out before the comparison.

⚠️ Common exam mistakes

Including abnormal wastage in cost — it must always be excluded regardless of amount
Using the raw stated cost (₹25,25,000) for comparison without first removing abnormal wastage
Treating transport cost as a selling cost and excluding it — transport TO bring inventory to location is always included
Applying the HIGHER of cost and NRV — the rule is always LOWER
Confusing NRV with market price — NRV is estimated selling price minus estimated completion and selling costs

Bare-Act text AS-2: Measurement of Inventories · Accounting Standard 2 (AS-2) – Inventories · click to expand

Inventory to be recognized at the lower of cost and net realizable value. Any costs that could not be reasonably allocated to the cost of production (e.g. general and administrative costs) and any abnormal wastage have been excluded from the cost of inventory. An acceptable valuation basis (e.g. FIFO, Weighted average etc.) has been used to value inventory.

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AS-2 Inventory Valuation – Cost vs NRV

Worked example

⚠️ Common exam mistakes