ICDS II – Valuation of Inventories

ICDS 2 shall be applied for valuation of inventories except in the case of :

a.       Work in progress under Construction Contract which is dealt in ICDS III

b.       Work in progress dealt under other ICDS

c.       Share, debenture and other financial instruments held as stock in trade which are dealt in ICDS 8

d.       Producer’s inventories of livestock, agriculture and forest products, mineral oils, ores and gases to the extent that they are measured at net realisable value.

e.       Machinery spares which can be used only in connection with a tangible fixed assets and their use is expected to be irregular shall be dealt in accordance with ICDS 5


Inventories : Are assets

(i)                  Held for sale in the ordinary course of business;

(ii)                In the process of production for such sale;

(iii)               In the form of materials or supplies to be consumed in the production process or in the rendering of services

Net Realisable Value:

Is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.



Inventories shall be valued at cost, or net realisable value whichever is low.

ICDS 2_1

ICDS 2_2




Cost of Inventories = Cost of purchase + Cost of services + Cost of conversion + Other costs incurred in bringing the inventories to their present condition and location.

Cost of Purchase = Purchase price + duties & taxes (non rebatable) + freight inwards + other expenditure directly attributable to the acquisition – Trade rebates and discounts

Cost of Services in case of service provider = Labour + other cost of personnel directly engaged in providing service (including supervisory personnel and attributable overheads).

Cost of conversion = direct costs + Allocated production overheads

Fixed Production overheads :

Normal absorption rate = fixed overheads / Normal capacity of production

ICDS 2_3

Note :- Where a production process results in more than one product being produced simultaneously and the costs of conversion of each product are not separately identifiable, the costs shall be allocated between the products on a rational and consistent basis. Where by‐products, scrap or waste material are immaterial, they shall be measured at net realisable value and this value shall be deducted from the cost of the main product.


Selection of policy

ICDS 2_4


·         Inventory valuation policy and Cost formula used

·         Total carrying amount of inventory and its classification appropriate to a person

·         Changes in accounting policy and the impact of such change are to be quantified.

Key differences with AS 2

  1. ICDS does not recognise standard cost method
  2. AS does not provide for the valuation of inventory at the date of dissolution.

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