Worked Solution
✓ VerifiedApplicable Standard: AS 2 — Valuation of Inventories
Step 1 — Cost of Purchase per kg:
Purchase price is ₹90 per kg for 13,000 kg. Since full CENVAT credit is admissible on excise duty of ₹5/kg, it is recoverable and excluded from cost. State VAT of ₹2.5/kg is not recoverable and hence included. Trade discount of ₹1/kg (even though received as cash, it reduces the purchase price) is deducted.
Net purchase price = ₹90 − ₹5 (excise, CENVAT) + ₹2.5 (VAT) − ₹1 (trade discount) = ₹86.5 per kg
Step 2 — Total Cost of Inventory:
Purchase cost (13,000 × ₹86.5) = ₹11,24,500; Add Freight = ₹30,000; Add Admin expenses to bring chemicals = ₹10,000; Less Sale of containers (not reusable, proceeds netted) = ₹500. Total cost = ₹11,64,000.
AS 2 para 6 includes all costs of purchase (net of recoverable taxes, less discounts) and all costs incurred in bringing inventories to present location and condition. Administrative overheads that do not contribute to bringing inventory to location are excluded — however, since these expenses are specifically incurred to bring the chemicals, they qualify for inclusion.
Step 3 — Normal vs. Abnormal Loss:
Normal transit loss = 4% × 13,000 = 520 kg → Normal expected receipt = 12,480 kg. Actual receipt = 12,400 kg. Abnormal loss = 80 kg (written off to P&L — not absorbed into inventory cost as per AS 2).
Step 4 — Cost per kg (based on normal expected quantity):
Cost per kg = ₹11,64,000 ÷ 12,480 = ₹93.27 per kg (rounded)
Step 5 — Allocation of Material Cost:
| Particulars | Kg | Rate (₹) | Amount (₹) |
|---|---|---|---|
| Material consumed | 10,000 | 93.27 | 9,32,700 |
| Closing inventory | 2,400 | 93.27 | 2,23,847 |
| Abnormal loss (P&L) | 80 | 93.27 | 7,462 |
| Total | 12,480 | 11,64,009 |
(Minor rounding difference of ₹9 due to rounding ₹93.27; exact rate = ₹93.2692)
Value of Closing Inventory as per AS 2 = ₹2,23,847 (2,400 kg × ₹93.27)
Write it like this
1The skeleton
- Start with the per-kg cost build-up — write it as a mini-reconciliation (Purchase price ± adjustments) so the examiner sees your logic in one glance before the numbers.
- Strike out CENVAT first, always — state explicitly 'full CENVAT credit admissible → recoverable → excluded from cost'; examiners are looking for this reasoning, not just the arithmetic.
- Separate normal loss from abnormal loss in its own step — compute 4% × 13,000 = 520 kg normal, then show actual shortfall vs. normal to isolate the 80 kg abnormal; this is where most marks sit.
- Divide total cost by normal expected quantity (12,480), NOT actual received (12,400) — this is the AS 2 mechanic; the abnormal loss gets the same per-kg rate, not zero.
- Present the final allocation as a three-row table — consumed / closing stock / abnormal loss, each with kg × rate = amount, totalling back to your Step 2 figure; examiners tick this table directly.
2Examiner-rewarded phrases
3Common trap
Heads up — the killer mistake here is dividing total cost by 12,400 (actual kg received) instead of 12,480 (normal expected kg). That gets you the wrong per-kg rate and loses you the abnormal loss mark entirely, even if every other step is perfect.