Cost Formulas

Accounting Standard – 2 (Revised) has laid down ground rules for valuation of inventories by indicating different (historical) cost formulas for different types of inventories as:

(i)    The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs.

(ii)    The cost of inventories, other than those dealt with in should be assigned by using the first-in-first-out (FIFO) or weighted average cost formula. The formula used should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and conditions.

The implications of the foregoing paragraphs 14 and 15 respectively of AS-2 (Revised) are that only following methods of inventory valuation, based on historical cost are permitted. (i) Specific Identification Method; (ii) First-in-First-out Method and (iii) Weighted Average cost Method. However in this text a brief description on Last-in-First-out (LIFO) is also given for the sake of academic discussion specific identification of cost means that specific cost are attributed to identified items of inventory. This is an appropriate treatment for items that are segregated for a specific project regardless of the fact whether they have been purchased or produced.

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