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Inventory Valuation (AS 2 / Ind AS 2)
FIFO, Weighted Average and NRV for UPSC EPFO APFC
Updated: 6 November 2026 · Accountancy · Beginner-friendly, exam-depth notes · ~11 min read
Why APFC asks this
Why inventory valuation mattersClosing stock sits in two places at once: it is deducted in the Trading Account to arrive at cost of goods sold, and it appears as a current asset on the Balance Sheet. So a small error in valuing it flows straight into gross profit, net profit and working capital. That is why the examiner keeps coming back to it: it tests prudence, consistency and arithmetic in a single question.
In plain words: first find the cost of the goods you still hold. Then ask what those goods could realistically fetch after finishing and selling costs. Carry them at the lower figure. That single prudence rule protects profit from looking better than cash reality.
The core rule is short. Inventories are valued at the lower of cost and net realisable value (NRV). Everything else in AS 2 is about how to measure cost and how to measure NRV.
What goes into cost
Cost of inventories has three building blocks: cost of purchase, cost of conversion, and other costs incurred to bring the goods to their present location and condition.
| Included in cost | Excluded from cost (expensed) |
|---|---|
| Purchase price, import duties and non-recoverable taxes, freight inwards, handling | Abnormal wastage of material, labour or other production cost |
| Direct labour and direct production costs | Storage costs, unless needed in the production process before a further stage |
| Systematic share of fixed and variable production overheads | Administrative overheads that do not help bring stock to present condition |
| Trade discounts and rebates are deducted | Selling and distribution costs |
Fixed production overheads are allocated on the basis of normal capacity. If a plant runs below normal capacity, the unallocated overhead is charged to the period instead of being loaded onto stock. Variable overheads are allocated on actual use of facilities. When a by-product is not material, it can be valued at NRV and deducted from the main product’s cost.
Cost formulas
- Specific identification is used for items that are not ordinarily interchangeable, such as separately identified projects or goods segregated for specific orders.
- FIFO assumes the oldest units are sold first, so closing stock carries the most recent purchase prices.
- Weighted average divides total cost of goods available by total units to give one average rate.
- LIFO is prohibited under Ind AS 2, and AS 2 recognises only FIFO and weighted average for interchangeable items.
Techniques such as the standard cost method or the retail method are acceptable only when the result approximates actual cost. The same cost formula should be used for all inventories of similar nature and use.
Worked example
Opening stock is 100 units at ₹10. Purchases are 200 units at ₹12 and 100 units at ₹14. Sales are 250 units. Total units available are 400 and total cost is ₹1,000 + ₹2,400 + ₹1,400 = ₹4,800. Closing stock is 150 units.
| Method | Closing stock | Cost of goods sold |
|---|---|---|
| FIFO (last 150 units: 100 at ₹14 + 50 at ₹12) | ₹2,000 | ₹2,800 |
| Weighted average (₹4,800 ÷ 400 = ₹12 per unit) | ₹1,800 | ₹3,000 |
Prices rose during the period, so FIFO gives a higher closing stock and a ₹200 higher profit than weighted average. In falling prices the effect reverses. A quick sanity check: closing stock plus cost of goods sold must always equal ₹4,800.
Lower of cost and NRV
NRV = estimated selling price − estimated cost of completion − estimated cost necessary to make the sale. Suppose an item costs ₹500 and can be sold for ₹560, but ₹30 is needed to finish it and ₹50 to sell it. NRV is ₹480, so each unit is carried at ₹480 and the ₹20 per unit write-down is charged to the Profit and Loss Account. For 100 units, that is ₹2,000.
Write-downs are assessed item by item, or by groups of similar items, not by netting gains against losses across unlike items. Raw materials are not written down below cost if the finished goods in which they will be used are expected to sell at or above cost. If a fall in material price signals that finished goods will sell below cost, materials are written down, and replacement cost can be the best measure of their NRV. Under Ind AS 2, if the reason for a write-down disappears, the reversal is limited to the original amount written down.
High-yield traps
- Selling price is not NRV. You must deduct completion and selling costs first.
- Abnormal wastage and selling costs never enter inventory cost.
- Recoverable taxes such as input tax credit are not part of cost; non-recoverable duties are.
- LIFO is not allowed, even though many textbooks still teach it.
- In rising prices FIFO gives higher profit than weighted average, and in falling prices the opposite.
- Closing stock adjustments after the balance sheet date use the reporting-date position: stock counted later is rolled back or forward to that date.
- Rule: lower of cost and NRV.
- Cost formulas: FIFO or weighted average for interchangeable items; LIFO not allowed.
- NRV: selling price minus completion and selling costs.
- Rising prices: FIFO shows higher closing stock and higher profit than weighted average.
Practice MCQs
Attempt all ten, then press Submit to see your score and explanations.
FAQ
Is inventory valued at cost or market price?
At the lower of cost and net realisable value. Market price alone is never the rule.
Can a company use LIFO in India?
Not under Ind AS 2, and AS 2 permits only FIFO or weighted average for interchangeable items.
Where do I practise more Accountancy for APFC?
Try the CrackTarget EPFO mock tests and the capital and revenue and depreciation notes to keep your accounting concepts connected.
Sources
ICAI Accounting Standard 2 (Valuation of Inventories) and Ind AS 2 (Inventories), as published by ICAI and MCA. Always confirm against the latest official text.