Page 3 - 7. COMPILER QB - INDAS 2

estimated selling expenses Rs. 0.5 million). Accordingly, inventory shall be measured at Rs. 7.5 million i.e.

lower of cost and net realisable value. Therefore, inventory write down of Rs. 2.5 million would be recorded
in the income statement of that year.

(b) As per Ind AS 2, a new assessment is made of net realizable value in each subsequent period. It Inter alia
states that if there is increase in net realizable value because of changed economic circumstances, the

amount of write down is reversed so that new carrying amount is the lower of the cost and the revised
net realizable value. Accordingly, as at 31 March 20X2, again inventory would be valued at cost or net

realisable value whichever is lower. In the present case, cost is Rs. 1 million and net realisable value would
be Rs. 10. 5 million (i.e. expected selling price Rs11 million – estimated selling expense Rs0.5 million).

Accordingly, inventory would be recorded at Rs10 million and inventory write down carried out in previous
year for Rs. 2.5 million shall be reversed.

Q2 (May 20)

The following is relevant information for an entity:
● Full capacity is 10,000 labour hours in a year.

● Normal capacity is 7,500 labour hours in a year.
● Actual labour hours for the current period are 6,500 hours.

● Total fixed production overhead is Rs 1,500.
● Total variable production overhead is Rs 2,600.

● Total opening inventory is 2,500 units.
● Total units produced in a year are 6,500 units.

● Total units sold in a year are 6,700 units.
● The cost of inventories is assigned by using FIFO cost formula.

How are overhead costs to be allocated to the cost of goods sold and closing inventory?

SOLUTION

Hours taken to produce 1 unit = 6,500 hours / 6,500 units = 1 hour per unit.
Fixed production overhead absorption rate:

= Fixed production overhead / labour hours for normal capacity
= Rs 1,500 / 7,500

= Rs 0.2 per hour
Management should allocate fixed overhead costs to units produced at a rate of Rs 0.2 per hour.

Therefore, fixed production overhead allocated to 6,500 units produced during the year (one unit per hour) =
6,500 units x 1 hour x Rs 0.2 = Rs 1,300.

The remaining fixed overhead incurred during the year of Rs 200 (Rs 1500 – Rs 1300) that remains
unallocated is recognised as an expense.

7. 2