If Inventory is Valued at a Notional Price

Notional Price is not the cost or market price. It is a price ascertained on some notional basis. It
may be—
(a) Standard Price Method: The standard price is fixed on the basis of the specific nature of
the product or service and the factors related to that. All issues during an accounting
period are charged at the Standard Price. The stock is valued as the balancing amount of
(1) costs of materials purchased or received at different rates and
(2) the value of quantities issued at standard price.
(b) Inflated Price Method : Issues are priced at an inflated rate. Such rate is calculated after
considering—
(1) addition of proportionate stock holding or carrying costs like costs of inspecting,
issuing. etc.
(2) deduction of natural or normal losses of materials, like leakage, evaporation, etc.
The cost of material issues is computed first by applying any method discussed earlier.
The adjustments [(1) and (2) as stated above] are made to find out the inflated price. The
inventory is valued by deducting the issues priced at inflated rate from the total cost of
materials purchased during a period.

It is to be noted that :
1. Inventories mean any tangible property held for sale, in the process of production for
such safe or for consumption in the production of goods or services for sale.
Maintenance supplies and consumables shall be included. But machinery spares should
be excluded.
2. Valuation of Inventories is required at the end of each accounting period for
(1) determining profit / loss during that period; and (2) for representing these as assets
in the Balance Sheet.
3. The contents of AS 2 mandatory w.e.f. 1.4.1999, should be complied with by all
enterprises for Valuation of Inventories.
4. The method of valuation should be consistent but should not be rigid.
5. In India, inventories should normally be valued at historical cost or net realisable value
whichever is lower.
6. Historical cost is the combination of : (a) Cost of Purchase; (b) Cost of Conversion and
(c) any other cost incurred in the normal course of business for bringing the inventories
up to their present location and condition.
7. Net Realisable value is the Actual or Estimated Selling Price less cost of completion
of works and cost to be incurred to complete the sale.
8. Inventories are to be classified normally in the financial statements as :
(1) Raw materials and components;
(2) Work-in-Process;
(3) Finished goods; and
(4) Stores and spares
9. Where an Inventory is carried at net realisable value, it should be disclosed in the
financial statements separately.
10. By-products should be valued at cost or Net Realisable Value, whichever is lower. But
if the cost of byproducts cannot be ascertained separately, their stock should be valued
at Net Realisable Value.
11. If there is any scope of reprocessing, the inventory of re-usable scrap should be valued
at cost (of material) less reprocessing cost. But if there is no such scope, the inventory
of re-usable scrap should be valued at Net Realisable Value.
12. Inventory of non-reusable scrap should be valued at Net Realisable Value

13. Perishable goods may be valued even below cost if conditions demand