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Valuation of closing stock in different situations

Mamta (Student CA CPT ) (27 Points)

25 March 2015

Cost of goods sold = Opening Stock + Purchases + Direct Expenses - Closing Stock

For Example If A buys 1000 units for Rs.100000 and spends Rs.5000 on freight inward. Closing stock is 100 units.

COGS = 100000 +5000 - 10000 (cost of 100 units of closing stock) = Rs.95000 Equation I

COGS = 100000 + 5000 - 10500 = Rs.94500 Equation II

In Equation 2 I have divided the freight inward between COGS and Closing Stock in the ratio of units. I wish to know which one of the above two approaches is correct, and why.

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3 Replies

CA PAYAL GAJJAR (Personal Practice) (150 Points)
Replied 27 March 2015

Second approach is correct. The reason behind this is:

According to AS 2 VALUATION OF INVENTORY, all cost related with the procurement of goods and which is necessary to bring the inventory to its present location and condition shall be included.

So, inward freight will also form a part of closing stock.

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Mamta (Student CA CPT ) (27 Points)
Replied 29 March 2015

Thanks Payal for your reply. I hope you would not mind my few queries.

Cost of Goods Sold = Opening Stock + Purchases A/c + Direct Expenses - Closing Stock

In Trading Account all direct expenses are debited so they become part of COGS. I agree as per AS 2 proportionate expenses should be allocated to closing stock. But in text books, I don't find this. Please explain.

CA PAYAL GAJJAR (Personal Practice) (150 Points)
Replied 30 March 2015

Hello Mamta,

You are always welcome.

See, COST OF GOOGS SOLD and VALUATION OF CLOSING STOCK are both diff thing.

In COGS all direct cost accumulated which is incured for the finishedv goods to be sold. And in this administrative and selling expenses will not be included. So in another way we say it

COGS= total sale - gross profit.

In closing stock valuation only those expenses which are directly related with purchase and manufacturing of the finished goods are included.

Please give m specific ref of book in which what u read ?? And what u understand?? becuase I think U are confused about COGS and inventory valuation