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ICDS II : Valuation of Inventories

Income Tax - Income computation and disclosure standards - 03 - This ICDS will generally apply only to assessees engaged in any business or profession whose income is chargeable to tax under the head Profits and gains of Business or profession . This Income Computation and Disclosure Standard is based on Accounting Standard 2 - Valuation of Inventories. 1. Scope:- This Income Computation and Disclosure Standard shall be applied for valuation of inventories, except the following : Work-in-progres .....

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inventory that have not been used in the construction work and have not become part of work-in progress of the contract will come within the scope of this ICDS and should be included as part of the inventory to be valued as per the requirements of this ICDS. (b) Provisions of ICDS II shall not apply to securities held as inventory by a person engaged in the business of insurance since profits and gains of any insurance business shall be computed in accordance with the rules contained in the Fir .....

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production or processing of goods, cost of such services will form part of inventory as part of cost of conversion. 4. Cost of Purchase:- The costs of purchase shall consist of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates and other similar items shall be deducted in determining the costs of purchase. 5. Costs of Services:- Where services have been utilised in manufacture, production or processi .....

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nto three categories: costs that are directly related to the units of production variable overheads and fixed overheads 7. Other Costs:- Other costs shall be included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. Generally, interest or other borrowing costs are not included in the cost of inventory. However, ICDS provides that if the inventory item meets the criterion for recognition of interest as a comp .....

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rative overheads that do not contribute to bringing the inventories to their present location and condition Selling costs Note: ICDS II does not specifically refer to distribution costs, costs such as expenses incurred at distribution depots are excluded from the costs of inventory since these are not costs incurred in bringing the inventories to their present location and condition. 9. Cost Formulae:- The Cost of inventories of items - that are not ordinarily interchangeable, and goods or servi .....

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re a large numbers of items of inventory which are ordinarily interchangeable, specific identification of costs shall not be made. Note: Under specific identification of cost, specific costs are attributed to identified items of inventory. 10. First-in First-out and Weighted Average Cost Formula ICDS II recognises that inventory valuation involves the process of approximation and estimation. It cannot be exact. Different cost formulae have different assumptions and considering the circumstances, .....

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during the period. The average is calculated periodically or as each additional shipment is received, depending on the circumstances. 11. Techniques for the Measurement of Cost (1) Techniques for the measurement of the cost of inventories, such as the standard cost method or the retail method, may be used for convenience if the results approximate the actual cost. Standard costs take into account normal levels of consumption of materials and supplies, labour, efficiency and capacity utilisation. .....

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h has been marked down to below its original selling price. An average percentage for each retail department is to be used. 12. Net Realisable Value:- Cost of inventory determined in accordance with ICDS should be compared with the NRV and lower of the two should be taken as the value of the inventory. ICDS requires that the comparison of cost and NRV should be done on item-by item basis and not globally. Where items of inventory' relating to the same product line having similar purposes or .....

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