Replacement cost

Dear Raman,

For Eg.

A company purchases 10Kg of steel @ Rs. 1000/kg and it uses it for the manufacturing process and at the end they realized 1kg of steel (as scrap) and a final product.

The cost incurred for manufacture of the final product is Rs. 15000 (Mat cost 9000 + Lab 6000)

And for scrap generation is Rs. 1500 (Mat cost 1000 + Lab 500).

Usually companies will use this scrap as their raw material for further production. In other words, the scrap generated by the company will be used as a replacement for raw material.

At the year end if the company is having this scrap as their stock they should value this scrap at cost or replacement cost which ever is lower. That is even if the company spent Rs. 1500 for manufacture of the scrap they should value it only at Rs. 1000 and should take the balance Rs. 500 to COGS