A company uses Raw material A to manufacture finished goods, price of the raw material A is on the decline. The finished goods in which the raw material is incorporated are expected to be sold below cost. The company is having a huge stock of raw material A however NRV of this raw material is not available as it is a rarely used stock. How should the company value raw material?

Solution

Material and other supplies (i.e., raw materials) held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished product will exceed net realizable value, the materials are written down to net realizable value. In such circumstances, the replacement cost of the material may be the best available measure of their net realizable value.