Ind AS 2 Inventory Costing for Manufacturing Companies
Reviewed by Ravi Sisodia · Last reviewed 13 August 2026
A manufacturing close file for conversion cost, normal capacity, NRV and write-down reversals.
Finin2min 2-Minute Summary
- Ind AS 2 measures inventories at the lower of cost and net realisable value (NRV).
- Cost includes purchase, conversion and other costs incurred in bringing inventory to its present location and condition.
- Fixed production overhead is allocated using normal capacity; low production or idle plant does not justify loading extra fixed overhead into each unit.
- Abnormal waste and other excluded costs belong in expense rather than being hidden in closing stock.
- When NRV later increases, a prior write-down is reversed within the limits of the original write-down.
Build cost from the production process, not from the P&L residue
Manufacturers should map raw material, labour, variable overhead and fixed production overhead to the production stages that create finished goods. The costing file must explain which expenditures bring inventory to its present location and condition and which costs are period expenses. A general-ledger label such as 'factory expense' is not enough evidence for capitalisation.
For fixed overhead, normal capacity is the control point. When a plant runs substantially below normal capacity, the unallocated fixed overhead is expensed; it is not used to inflate unit cost. During unusually high production, the fixed overhead rate per unit is reduced so inventory is not carried above an appropriate cost allocation.
NRV is an item-level commercial test
At each reporting date, compare cost to the estimated selling price less estimated completion and selling costs. Slow-moving stock, damaged goods, customer-specific inventory and falling selling prices need separate evidence. Grouping inventory too broadly can hide losses in one line behind margins in another.
NRV is reassessed in later periods. If the reason for a write-down no longer exists, or NRV increases because circumstances improve, Ind AS 2 allows a reversal limited to the amount of the original write-down.
Worked example: under-utilised plant
A factory normally produces 100,000 units a year and incurs Rs 2 crore of fixed production overhead. If a temporary demand shock reduces production to 50,000 units, management should not simply divide Rs 2 crore by 50,000 and double the fixed overhead absorbed per unit. The allocation uses normal capacity; the unallocated portion is recognised as an expense. The inventory file should show the normal-capacity basis, actual output and unallocated amount.
Month-end evidence file
- Approved bill of material and routing.
- Normal-capacity working and production statistics.
- Overhead pool mapping with exclusions for abnormal items.
- Cost-formula consistency for interchangeable inventories.
- Ageing, selling-price evidence and completion/selling-cost assumptions for NRV.
- Write-down and reversal roll-forward by material inventory class.
Questions finance teams commonly ask
Is inventory always carried at historical cost?
No. Ind AS 2 requires the lower of cost and NRV.
Can idle-plant fixed overhead be capitalised by increasing the unit rate?
Ind AS 2 bases fixed production overhead allocation on normal capacity; unallocated overhead from low production is expensed.
Can a previous inventory write-down be reversed?
Yes, when NRV increases or the circumstances causing the write-down no longer exist, subject to the limit of the original write-down.
Is FIFO mandatory?
No. For ordinarily interchangeable items, Ind AS 2 permits specified cost formulas such as FIFO or weighted average, applied consistently to inventories with similar nature and use.
Official sources
- ICAI - Ind AS 2 Inventories - Paras 9-13 and 34: lower of cost/NRV, normal-capacity overhead and reversal
- ICAI - Compendium 2025-26 - Current Ind AS corpus
- ICAI - Notified Ind AS Rules - Current rules gateway
- Finin2min Ind AS hub - use the standard-level page for broader paragraph-by-paragraph learning.
Disclaimer
Professional-use caution: Inventory caution: costing and NRV outcomes depend on the manufacturing process, normal capacity, product condition and evidence available at the reporting date. Educational and professional reference only; confirm the current notified text and the facts of your case before relying on this page.