Valuation of inventory

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Querist : Anonymous

Querist : Anonymous (Querist)

23 September 2011 in a trading organisation where the company is operating all india basis and having the warehouses in every state. should the freight paid on stock transfer from one branch to another against form-F be included in the cost of inventory.

CA Sumat Singhal

CA Sumat Singhal (Expert)
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29 September 2011 As per AS 2 other cost that are incurred to bring the inventory in present location and conditions are included in cost of inventory.
CLARIFICATIONS
EXCLUSION OF CERTAIN COSTS
storage costs unless those costs are indispensable in production prior to further processing.
SO JUDGE YOUR PRODUCTION PROCESS FROM ABOVE SAID STANDARDS.
Kindly let me know whether this solution has solved your query.
Regards,
CS Sumat Singhal

Querist : Anonymous

Querist : Anonymous (Querist)

29 September 2011 i have already stated it is trading organisation and the company is importing into india .

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2025 Thanks for sharing the details!

Here’s the clarity on **valuation of inventory and inclusion of freight on stock transfers in a trading organization with multiple warehouses across states:**

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### Key Points:

1. **Accounting Standard (AS) 2 on Inventory**
As per AS 2 (Valuation of Inventories), cost of inventory includes:

* Purchase price
* Import duties and other taxes (excluding those recoverable)
* Transport, handling, and other costs directly attributable to bringing the inventory to its present location and condition.

2. **Freight on Stock Transfer Between Branches**

* Freight paid on transferring stock between branches (internal stock transfer) **should be included in inventory cost** *if* it is necessary to bring the goods to the location where they are held for sale or use.
* Since the goods are physically moving from one warehouse to another, the freight is a cost incurred to bring inventory to the new location, so **it should be included in the cost of inventory at the receiving warehouse.**

3. **Form-F and VAT/State Tax Aspect**

* If Form-F is issued (used for inter-state stock transfer without payment of VAT), it relates to tax compliance and does not affect the valuation principle.
* Inclusion of freight in cost of inventory is based on accounting standards, irrespective of tax forms used.

4. **Trading Organization Context**
Since it is a trading company, and the goods are being transported between warehouses, the freight charges are a cost of bringing inventory to the point of sale/storage and hence should be capitalized as part of inventory cost.

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### Summary:

| Scenario | Freight Included in Inventory Cost? |
| ----------------------------------------------- | --------------------------------------------------------------- |
| Freight on stock transfer between branches | **Yes**, if freight is necessary to bring inventory to location |
| Freight related to storage only (no processing) | **No**, storage costs generally excluded |

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### Practical Note:

* If freight is paid on delivery to customer, it is not part of inventory cost but selling expense.
* Proper documentation and accounting policies should clearly state treatment of such freight costs.

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If you want, I can help draft an accounting policy note or provide references to AS 2 text for your internal use.

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