Page 11 - 7. COMPILER QB - INDAS 2

QUESTIONS FROM PAST EXAM PAPERS

Q9 (May 18 – 4 Marks)

XYZ Limited has a plant with the normal capacity to produce 10,00,000 units of a product per annum and the
expected fixed overhead is Rs. 30,00,000, Fixed overhead, therefore based on normal capacity is Rs. 3 per unit.
Determine Fixed overhead as per Ind AS 2 'Inventories' if (i) Actual production is 7,50,000 units. (ii) Actual
production is 15,00,000 units.
SOLUTION

(i) Actual production is 7,50,000 units:
Fixed overhead is not going to change with the change in output and will remain constant at Rs. 30,00,000,
therefore, overheads on actual basis is Rs. 4 per unit (30,00,000 / 7,50,000).

Hence, by valuing inventory at Rs. 4 each for fixed overhead purpose, it will be overvalued and the losses of
Rs. 7,50,000 will also be included in closing inventory leading to a higher gross profit than actually earned.
Therefore, it is advisable to include fixed overhead per unit on normal capacity to actual production (7,50,000 x
3) Rs. 22,50,000 and balance Rs. 7,50,000 shall be transferred to Profit & Loss Account.

(ii) Actual production is 15,00,000 units:

Fixed overhead is not going to change with the change in output and will remain constant at Rs. 30,00,000,
therefore, overheads on actual basis is 2 (30,00,000 / 15,00,000).
Hence by valuing inventory at Rs. 3 each for fixed overhead purpose, we will be adding the element of cost to
inventory which actually has not been incurred. At Rs. 3 per unit, total fixed overhead comes to Rs. 45,00,000

whereas, actual fixed overhead expense is only Rs. 30,00,000. Therefore, it is advisable to include fixed
overhead on actual basis (15,00,000 x 2) Rs. 30,00,000.

Q10. (Nov. 20 – 4 Marks)

Sophia Ltd. has fabricated special equipment (Inverter panel) during 4 the financial year 2018-19 as per
drawing and design supplied by the customer. However, due to a liquidity crunch, the customer has requested
the company for postponement in delivery schedule and requested the company to withhold the delivery of
finished products and discontinue the production of balance items.
As a result of the above, the details of customer balance and the goods, held by the company as work-in-

st
progress and finished goods as on March 31 , 2020 are as follows:
Inverter panel (WIP) ₹ 255 lakhs

Inverter panel (finished goods) ₹ 165 lakhs
Sundry Debtor (Inverter panel) ₹ 195 lakhs

The petition for winding up against the customer has been filed during the financial year 2019 — 20 by
Sophia Ltd.
You are required to Comment with explanation on provision to be made for ₹ 615 lakh included in Sundry
Debtors, Finished goods and Work-in-Progress in the financial statement for the Financial year 2019 — 20.

SOLUTION
Sophia Ltd. is a manufacturer of inverter panels. As per Ind AS 2 ―Inventories‖, inventories are assets (a) held

for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form
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