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Treatment of trial run production cost

Raja (CA Job) (30 Points)

09 September 2012

As per accounting standard asset is capitalised at cost including cost of trial run less sale value of goods generated during trial batch.

However what should be the treatment when goods produce during the trial batch are not sold till year end or upto the date of finalization of accounts for the year. Further the market value of the same is also not known as the same are not as good as final product but have demand in market i.e, saleable.

Should the same be inventorised at cost or capitalised with fixed assets i.e, not to deduct saleable value from trial run cost.

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4 Replies

financehub (MBA) (27 Points)
Replied 09 September 2012

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Bhaskar Unnikrishnan CPA CMA (Accounts / Administration) (414 Points)
Replied 10 September 2012

Extract from IAS 10:

9.3 The expenditure incurred on start-up and commissioning of the project,

including the expenditure incurred on test runs and experimental production,

is usually capitalised as an indirect element of the construction cost. However,

the expenditure incurred after the plant has begun commercial production,

i.e., production intended for sale or captive consumption, is not capitalised

and is treated as revenue expenditure even though the contract may

stipulate that the plant will not be finally taken over until after the satisfactory

completion.

9.4 If the interval between the date a project is ready to commence

commercial production and the date at which commercial production

actually begins is prolonged, all expenses incurred during this period are

charged to the profit and loss statement. However, the expenditure incurred

during this period is also sometimes treated as deferred revenue

expenditure to be amortised over a period not exceeding 3 to 5 years after

the commencement.

Bhaskar Unnikrishnan CPA CMA (Accounts / Administration) (414 Points)
Replied 10 September 2012

Originally posted by : CMA Bhaskar Unnikrishnan MBA
	Extract from IAS 10: 9.3 The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, is usually capitalised as an indirect element of the construction cost. However, the expenditure incurred after the plant has begun commercial production, i.e., production intended for sale or captive consumption, is not capitalised and is treated as revenue expenditure even though the contract may stipulate that the plant will not be finally taken over until after the satisfactory completion. 9.4 If the interval between the date a project is ready to commence commercial production and the date at which commercial production actually begins is prolonged, all expenses incurred during this period are charged to the profit and loss statement. However, the expenditure incurred during this period is also sometimes treated as deferred revenue expenditure to be amortised over a period not exceeding 3 to 5 years after the commencement.