Tax audit clause 44

When cost of purchased goods gets lower in the market, its FMV is called replacement cost..

1   If the finished product is sold at cost or above cost in the market as of a cut off date Then inventories will be valued at cost But if 
2   If the finished product is sold below cost Then the inventory will be valued at its selling price or replacement price.

Example
1 Maruti Ltd sells product Notebook and Pens, the raw materials used in manufacturing of notebook is wood and in case of pens is plastic respectively The cost of wood and plastic is Rs 10 and Rs 50 respectively The realizable value (replacement cost) of wood and plastic is Rs 8 and Rs 35 respectively.
However  it is expected that the Notebook will be realized at 15 of gross profit, whereas Pen is expected to be making a loss of 10 of the total cost .....

What will be the value at which wood and plastic will be recognized in the books?
•
As per AS 2 materials and supplies held for use in the production of inventories are not written down below cost if
the finished products in which they will be incorporated are expected to be sold at or above cost
•
In case of wood cost is Rs 10 and net realizable value is Rs 8 Since the price of finished goods is expected to be
above the cost even though NRV is less, the Company will value the wood at Rs 10
•
However, when there has been a decline in the price of materials and it is estimated that the cost of the finished
goods will exceed the net realizable value, the materials are to be written down to its net realizable value In these
circumstances, replacement cost may be the best available measure of their net realizable value
•
Hence in case of plastic the cost is Rs 50 and net realizable value is Rs 35 since final product Pen is expected to be sold at a value less than its cost, the Company will value the plastic to its estimated realizable value Replacement Cost of Rs 35 at the year end.

Yes, so in above case the lower value is selected....

Yes Correct...       

Here there is expected profit on notebook (Rs. 15/-) so, no need to take realized value, but cost value Rs. 10 is taken.

When the cost is higher than realizes value, in case of profit cost value is considered. But if there is loss in final value, then lower of the both is considered.

Ultimately it will not effect final P&L account.

Now Tomorrow...

Good Night....