ACCOUNTING PROJECT

ON ACCOUNTING STANDARDS 2 INVENTORY CONTROL

VALUATION OF INVENTORIES

PRESENTERS OF THE DAY

Nikhil Tambe Nikhita Rane Nisha Raina 1231 1232 1233

ABOUT ACCOUNTING STANDARDS 2

Accounting standard AS-2 VALUATION OF INVENTORIES issued by the council of the institute of chartered accountant of India.
This revised Standard supersedes Accounting Standard ( AS2). Valuation of Inventories, issued in June, 1981. The revised standard comes into effect in respect of accounting periods commencing on or after 1.4.99 & its mandatory in nature

OBJECTIVES OF INVENTORY
A primary issue in accounting for inventories is the determination of the value at which inventories are carried in the financial statements.
This Standard deals with the determination of such value, including the ascertainment of cost of inventories and any write-down there of to net realisable value.

SCOPE OF INVENTORIES
This standard has wider scope in all the areas of inventory. Work in progress under construction contractsdirect related services. Work in progress arising in the ordinary course of business of service providers. Shares, debentures and other financial instruments held as stock-in-trade.

Producers inventories of livestock, agricultural industries & forest products. Mineral oils & oars to the extent they are measured on Net Realisable Value.

Continued.
The inventories measured on Net realizable value at certain level of production. This occurs when , when agricultural crops have been harvested or mineral oils, ores and gases, have been extracted and sale is assured under a forward contract or a government guarantee, or when a homogenous market exists and there is a negligible risk of failure to sell. These inventories are excluded from the scope of this Standard.

DEFINITION OF INVENTORIES
INVENTORIES are assets: Held for sale in the ordinary course of business. In the process of production for such sale.

In the form of materials or supplies to be consumed in the production process or in the rendering of services.

CONTINUED
Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arms length transaction

MEASUREMENT OF INVENTORY
INVENTORIES should be valued at lower of Cost and Net realizable value. Net Realizable Value = Estimated selling price Estimated cost necessary to make sale.

COST OF INVENTORIES
These include all cost of purchase, cost of conversion and other cost incurred in bringing the inventories to their present location and condition. COST OF PURCHASE: Purchase price net of Trade discount, Rebate, etc. COST OF CONVERSION: Include cost directly related to unit of production i.e. direct wages, variable overhead, allocable fixed overhead.

CONTINUED
INCLUDES:

EXCLUDES: -

Cost of PURCHASES. Cost of CONVERSION. Installation Cost. Cost of INVENTORIES. Abnormal amount. Storage cost unless necessary in the production. Administration cost. Selling & distribution.

ADVANTAGES OF INVENTORY
Supply and Demand Steam line operations. Lead time adjustment. Reduce liabilities. Maintain item master file for company. Process the inventory within the company. Facilitates purchasing. Provide adequate amount of inquiry and management reporting capabilities.

DISADVANTAGES OF INVENTORY Bureaucracy. Impersonal touch. Production problems. Inventory diversity drives up cost. Inventory turnover drives up cost. Inventory control system & Accounting.

METHODS OF INVENTORY VALUATION WEIGHTED AVERAGE COST. FIRST IN FIRST OUT (FIFO). LAST IN FIRST OUT (LIFO). ECONOMIC ORDER QUANTITY (EOQ). JUST IN TIME (JIT).

WEIGHTED AVERAGE COST METHOD

In weighted average method both inventory & cost of good sold are based upon the average. Weighted Average Cost Method is very rarely used in actual practices. Example: price of 10 unit of product of A is : 50, 20, 30, 10, 40, 60, 40, 50,10, 30. Price of 5 unit of product B: 70, 80, 20, 10, 50. The average price of A is 34. The average price of B is 46. The weighted average price of both A & B product equal to-: 34(10)= 340 + 46(5 ) =230 total 570/( 10 + 5) = 38 weighted average price

FIRST IN FIRST OUT (FIFO)

Under FIFO the cost of good sold is based upon the cost of material bought in earliest period The cost of inventory is based upon the cost of material bought later in year. Under FIFO, the oldest good are sold first & new good are sold last. Formula of FIFO- : Unit cost per batch = ( cost/ quantity ) for per batch where as cost of good sold is =( unit cost * quantity ) for each batch.

LAST IN FIRST OUT (LIFO)

The cost of inventory is based upon the cost of material bought earlier in year. LIFO , New good sold first & old good sold last Formula of LIFO- : Unit cost per batch = ( cost/ quantity ) for per batch where as cost of good sold is =( unit cost * quantity ) for each batch. LIFO method cost of goods sold depend on cost of material bought at end of period.

EFFECT ON PROFIT
Valuation of inventories affect profit.
COGS differs in both methods FIFO & LIFO. If COGS is Low that means Gross profit will increase

Gross Profit = Sales COGS

Inventory Valuation By Three Methods:

ECONOMIC ORDER QUANTITY

Known & constant demand.
Known & constant lead time. Instantaneous receipt of material. No quantity discounts. Only order (setup) cost & holding cost.

No stock outs.

ECONOMIC ORDER QUANTITY

EOQ

2 D S H

D= Annual demand (units) S= Cost per order ($) C= Cost per unit ($) I = Holding cost (%) H = holding cost ( I x C)

EOQ EXAMPLE
You Are a buyer for SaveMart.
SaveMart make 1000 coffee makers per year. The cost of each coffee maker is $78. Ordering cost is $100 per order. Carrying cost is 40% of per unit cost. Lead time is 5 days. SaveMart is open 365 days/yr. What is the Economic order quantity?

SOLUTION
EOQ
D= S= C= I= H= H= 1000 $100 $ 78 40% CxI $31.20

2 D S H

2 1000 $100 EOQ $31.20

EOQ = 80 coffeemakers

JUST IN TIME (JIT)

Just In Time (JIT) is a production and inventory control system in which materials are purchased and units are produced after consumer demand Inventories are reduced to the minimum and in some cases are zero. Due to this Funds that were tied up in inventories can be used elsewhere. Defect rates are reduced, resulting in less waste and greater customer satisfaction. Throughout time is reduced, resulting in greater potential output and quicker response to customers.

PROCESS IN JUST IN TIME

LIST OF COMPANIES THAT USE JIT

Harley Davidson Toyota Motor Company

General Motors
Ford Motor Company Manufacturing Magic Dell computer etc..