Basic query in accounting

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pavankumar (Querist)
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30 September 2013 Cost of material=Rs100 Replacement cost of material (Due to Fall in price)=Rs 80, Expected Selling price of Finished product=Rs 230, Expected Conversion cost to be incurred=Rs 120.
In above case,
Q1)What shall be “NRV of Finished Goods” and” Cost of Finished Goods”?
I will be very much thankful to you.

CA Parul Saxena

CA Parul Saxena (Expert)
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30 September 2013 Cost of Finished goods:-
Material....................100
Conversion cost.............120
Total.......................220

NRV of the goods=230

pavankumar

pavankumar (Querist)
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30 September 2013 I have a still query.
Q1)While finding cost of finished goods why we have not taken Material at replacement cost.?
Q2)While finding NRV why we have not deducted
Expected Conversion cost bec NRV=Estimated Selling price-Estimated costs of completion.

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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18 July 2024 Let's address your questions step by step based on the scenario provided:

### Q1: NRV of Finished Goods and Cost of Finished Goods

1. **Net Realizable Value (NRV) of Finished Goods:**
- NRV of Finished Goods is the estimated selling price minus the estimated costs necessary to make the sale. In your case:
- Expected Selling Price of Finished Product = Rs. 230
- Estimated Conversion Cost = Rs. 120

Therefore,
\[
NRV = Rs. 230 - Rs. 120 = Rs. 110
\]

So, the Net Realizable Value (NRV) of the Finished Goods is Rs. 110.

2. **Cost of Finished Goods:**
- The Cost of Finished Goods is typically calculated based on the cost of materials used plus conversion costs incurred. In your case, the details provided are:

- Cost of Material = Rs. 100 (original cost)
- Expected Conversion Cost = Rs. 120

Therefore,
\[
Cost of Finished Goods = Rs. 100 (Cost of Material) + Rs. 120 (Conversion Cost) = Rs. 220
\]

So, the Cost of Finished Goods is Rs. 220.

### Q1: Why Material at Replacement Cost is Not Used in Cost of Finished Goods Calculation

- In accounting, the Cost of Finished Goods is typically based on historical costs (original cost) rather than replacement costs. Replacement cost is relevant in scenarios like inventory valuation under certain accounting methods (like lower of cost or market). However, for calculating the Cost of Finished Goods, the original cost of materials used is generally considered.

### Q2: Why Conversion Cost is Not Deducted from NRV to Find NRV

- Net Realizable Value (NRV) is calculated by deducting all estimated costs necessary to make the sale, including the costs of completion (like conversion costs), but typically not including selling costs (since they come after completion).

- In your scenario:
- Estimated Selling Price = Rs. 230
- Estimated Conversion Cost = Rs. 120

Therefore, the NRV calculation is:
\[
NRV = Rs. 230 - Rs. 120 = Rs. 110
\]

This calculation focuses on the direct costs of completing the finished goods (conversion costs) and does not include selling costs or other indirect costs beyond the completion stage.

In summary, the NRV of Finished Goods is determined by subtracting the estimated costs of completion (like conversion costs) from the estimated selling price. The Cost of Finished Goods, on the other hand, is based on the historical cost of materials used and the conversion costs incurred. These principles help in determining the profitability and valuation of inventory and finished goods in accounting and financial reporting.

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