METHODS OF VALUATION OF INVENTORIES
According to International Accounting Standard: 2 (lAS: 2), the inventories should be valued at the lower of “historical cost” and “net realisable value”.
Historical Cost
Historical cost of inventories is the aggregate of costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
Thus Historical cost includes not only the price paid for acquisition of inventories but also all costs incurred for bringing and making them fit for jise in production or for sale e.g. transportation costs, duties paid, insurance-in-transit, manufacturing expenses,wages paid or manufacturing expenses incurred for converting raw materials into finished products etc. Selling expenses such an advertisement expenses r storage costs should not be included.
A major objective of accounting for inventories is the proper determination of income thmugh the process of matching appropriate costs against revenues. It requires assigning of proper costs to inventory as well as goods sold.
However, it should be noted that assigning of such costs need not conform to the physical flow of goods.
The various methods for assigning historical costs to inventory and goods sold are being explained below.
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