Raw material valuation

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CMA Pravat Kumar Parida (Querist)
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23 November 2013 Require Treatment of Scrap Generated from raw material having very low market price in order to find the Raw Material Consumed.

Ramkrishna Mokashi

Ramkrishna Mokashi (Expert)
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24 November 2013 You should add up the scrap cost as RM. Since the scrap's recoverable value is quite low, it does not make sense to reduce it from Material cost.

eg.
Input Material - 10kg x 100 = 1000
Output Material - 9kg
Scrap - 1kg

The Output material can be valued at 1000/9 =111.11
And scrap 1 kg can be valued at nominal value.

Alternatively, you can also have market value for the scrap, and reduce it from 1000.
eg. If scrap's market rate is 1 Rs./Kg.

Output Material - (1000-1)/9 = 111.00

The difference would be just 0.11 paisa. and you might want to ignore that on the materiality and for simplicity

CMA Pravat Kumar Parida

CMA Pravat Kumar Parida (Querist)
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29 November 2013 Opening/Closing stock Raw Material stock is grouped under Increase/Decrease in stock of Finished Goods in case of Profit and Loss Statement, so deducting the scrap material from raw material cost and how is it possiable to present.

Ramkrishna Mokashi

Ramkrishna Mokashi (Expert)
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29 November 2013 Opening/Closing stock Raw Material stock is grouped under Increase/Decrease in stock of Finished Goods??? Shouldn't RM cost get in RM consumed??

When the Production reporting happens (purely from IGAAP perspective):-
Cr. 1000 - RM consumed
Dr. 1000 - Increase in FG

From Management reporting perspective:-
Cr. Raw Material Inventory - 1000 (10 x 100)
Dr. FG Inventory - 1000 (9 x 111.11)

The consumption entry would come only when you sell the FG (eg. sold at 1500 rs)
Cr. Sales - 1500
Dr. Customer A/c - 1500
Cr. FG Inventory - 1000
Dr. Cost of Sales - 1000

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