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AS-2 Question. Help

Sid_To_Be_CA (Staff Accountant) (63 Points)

25 April 2010

XYZ ltd produced 10,00,000 units of prod A per unit cosr as follows:

RM 100 p.u

DW 50 P.u

D.exp 2 p.u

Production overhead is Rs.20,00,000 of which 40% is fixed. The co. sold 8,00,000 units and 2,00,000 unis are in stock. Normal capacity is 5,00,000 units.

Calculate value of closing stock.

Thanks

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6 Replies

vishnupriya (CA Final) (1418 Points)
Replied 25 April 2010

AS-2 Valuation of inventories says closing stock is valued at cost of goods(production) or market value whichever is low..

you did not mentioned market value. so I consider the cost

200000 x 152 =304.00 lacs
+ 40% of proportionate fixed cost =1.60 lacs

+variable costs = 2.40 lacs

Total=308 lacs

vikash rathi (Chartered Accountant) (787 Points)
Replied 25 April 2010

agree with the above....but if u cosider fixed overhead as in direct expenses.(or as office expenses) then same should be ignored....other wise above one is right

CA Anshu Agarwal (B€ @LW@¥$ ]-[@Pp¥) (1832 Points)
Replied 25 April 2010

solution given by Vishnu Priya is correct except total mistake [ 304 + 2.4 + 1.6 = 308 , not 329.6]

CA Anshu Agarwal (B€ @LW@¥$ ]-[@Pp¥) (1832 Points)
Replied 25 April 2010

Originally posted by : vikash
	agree with the above....but if u cosider fixed overhead as in direct expenses.(or as office expenses) then same should be ignored....other wise above one is right

clearly given that overhaeads are production oveheads, so no need to consider the overhead as office expenses.

(Guest)

Dear,

Inventory value per unit in accordance with AS - 2

Particulars					Value P.u
					Rs.

Raw material					100.00
Direct wages					50.00
Direct expenses					2.00
Production OH		Rs.20,00,000

60% Variable (Rs.12,00,000/10,00,000 units)					1.20

40% Fixed (Rs.8,00,000/10,00,000 units)					0.80

					154.00

Closing Stock

	Cost of inventories
		(200000 units * Rs.154 p.u)			30800000

	FMV				?

	Whichever is lower.


Consider the following example :

Normal level of production 100000 units
Fixed production overheads Rs.500000
Actual production

Case 1		100000 units
Case 2		80000 units
Case 3		125000 units

Solution

FOH recovery rate =		Total Fixed production OH
		Normal Level of production

		(Rs.500000/100000 units) = Rs.5 p.u

Note : In case of abnormally high production denominator of normal capacity
	should be replaced by actual prodution.









Case	Normal	Recovery	OH	OH	Total OH
	Recovery	rate	Recoverd	treated as
	rate	to be used		period exp
		as per AS -2
	Rs.	Rs.	Rs.	Rs.	Rs.
1	5	5	500000	0	500000
2	5	5	400000	100000	500000
3	5	4	500000	0	500000


		(500000/125000) = Rs.4


Note :
Allocation of fixed prodution OH (As per AS-2)

Fixed production OH are worked out on principles of absorbtion costing.
Allocation of fixed production OH for their inclusion in cost of conversion shuold be based on
normal capacity of production facilities.

normal capacity is production expected to be achieved on an average over a no.of periods or
seasons under normal circumstances,taking into account
the loss of capacity resulting from planned maintenance.

Actual level of production may be used if it approximates normal capacity.

Opinions of expert advisory committee of ICAI

Normal capacity should be assessed by taking into account designed capacity,
normal level of efficiency based on actual working conditions(and not idle working conditions)
and estimated loss of production due to planned maintenance.

Installed capacity may not often represent normal capacity.
normal capacity is to be determined as per AS-2

There is no hard and fast rule that normal capacity sholud be determined only
in terms of labour hours.
It may be determined in terms of units of production, machinery hours ect.,

Idle time due to normal reasons should be considered in determining normal capacity.

Idle time due to abnormal reasons (e.g. due to delay in receipt of orders)
should not be deducted to determine normal capacity.

Overhead expenses related to idle capacity sholud be treated as period costs
(i.e) expensed in the period in which they are incurred.

In the case of a newly commissioned plant, normal capacity should be determined
with reference to the period in which the plant would attain stability.

Allocation of fixed production OH should be based on normal capacity so determined
even in the initial years when actual capacity utilisation may be lower tha normal capacity.




Amount of Fixed production OH allocated to each unit of production is
not increased as a consequence of low production or idle plant.

Unallocated OH are recognised as an expense in the period in which they are incurred.

In periods of abnormally high production, the amount of fixed production OH allocated to each unit
of production is decreased so that inventories are not measured ABOVE COST.

Source :
	Indian Accounting Standards & Gaap - Dolphy D' Souza
	(Commentary,Issues & Solutions)

	Accounting Standards - An auditors perspective.
			CA Association - Ahmedabad.