Choose the formula before seeing its profit effect
Ind AS 2 paragraphs 23–27 distinguish specific identification for the stated non-interchangeable/project inventory from FIFO or weighted average for other inventory. Similar nature and use require the same formula; different nature or use may justify different formulas. A geographical or tax-rule difference alone is insufficient. This guide, checked on 26 October 2026, applies to entities using Ind AS and ordinary inventory within the standard’s measurement scope, not its excluded instruments or special commodity/producer measurement cases. ICAI: Ind AS 2, paragraphs 9, 23–27 and 36(a).
Specific identification needs genuine item identity
Under paragraphs 23–24, trace actual individual costs for the specified non-interchangeable or segregated project items. Do not select the cheapest or most expensive units left in a fungible stock pool simply to engineer profit. A serial number is useful evidence but does not, by itself, settle whether the economic inventory population falls within the specific-identification rule.
FIFO is a cost-flow assumption
FIFO assigns earlier purchase/production costs to issues first and leaves more recent layers in closing stock. Preserve quantity and cost layers through receipts, issues and returns. The accounting assumption does not prove actual physical dispatch order or replace shelf-life controls. LIFO is not one of the formulas permitted by paragraph 25 for this inventory population.
Weighted average can be periodic or updated on receipt
Paragraph 27 allows average computation on a periodic basis or as each additional shipment is received, depending on the entity’s circumstances. Periodic average divides the available cost of the period by the matching available quantity. A moving calculation updates the balance after receipts and uses that current average for intervening issues. Do not average unit prices without their quantities or divide the full-period cost by only the closing units.
Different timing methods can produce different valid workings
State the adopted method and consistently implement it. A periodic and moving average are not necessarily numerically identical when issues occur between receipts. Changing methods or policies needs separate analysis under applicable accounting requirements; a favourable margin is not a sufficient conclusion here. Reconcile opening quantity/cost plus receipts less issues to closing quantity/cost, retaining sufficient precision before presentation rounding.
The cost formula does not replace NRV or disclosure
Paragraph 9’s lower-of-cost-and-NRV measurement still applies, and paragraph 36(a) requires disclosure of measurement policies including the cost formula. The illustrations isolate cost allocation with fully determined eligible unit costs and no taxes, rebates, abnormal waste or financing complications. Except for the explicit NRV example, assume NRV exceeds cost. They do not establish income-tax inventory treatment or permit a formula to compensate for missing physical stock.
Applicable primary references
ICAI: Ind AS 2, paragraphs 9, 23–27 and 36(a)
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: FIFO layers
Opening stock is 100 units at ₹10 and a receipt is 100 units at ₹14 before an issue of 120 units. Available cost is ₹2,400. FIFO issue cost is ₹1,000 plus ₹280, totalling ₹1,280. Closing stock is eighty units at ₹14, or ₹1,120; the two cost totals reconcile to ₹2,400.
Illustrative example 2: Periodic weighted average
Using the same 200 available units and ₹2,400 cost, periodic average is ₹12 per unit. An issue of 120 units costs ₹1,440 and eighty closing units cost ₹960. The ₹160 difference from the FIFO closing result reflects allocation on these facts, not a newly created loss or gain.
Illustrative example 3: Moving average with an intervening issue
Begin with 100 units at ₹10. Issue fifty units for ₹500, leaving fifty units costing ₹500. Then receive fifty units at ₹14, adding ₹700. The new 100-unit pool costs ₹1,200, or ₹12 per unit. Issue sixty units for ₹720 and close forty units at ₹480. Total issue cost ₹1,220 plus closing ₹480 equals available ₹1,700.
Illustrative example 4: Periodic average for that chronology
For the same 100 opening units and fifty purchased units, full-period available cost is ₹1,700 over 150 units. Periodic average is ₹11.333333… . Total issues of 110 units cost ₹1,246.67 and forty closing units cost ₹453.33 when presented to two decimals. The moving-average closing result was ₹480, a ₹26.67 presentation difference. Retain unrounded working precision.
Illustrative example 5: Specific identification
Two qualifying non-interchangeable project items have traced costs of ₹30,000 and ₹45,000. The first is sold and the second remains. Issue cost is ₹30,000 and closing cost ₹45,000, reconciling to ₹75,000. A general average of ₹37,500 each would lose the actual identity required on these assumptions.
Illustrative example 6: Apply NRV after assigning cost
Eighty units have assigned FIFO cost of ₹14 each, totalling ₹1,120. Supported NRV is ₹13 per unit, or ₹1,040. Closing carrying value is ₹1,040 and the write-down is ₹80. The formula establishes cost; it does not allow the higher ₹1,120 to survive a lower supported NRV.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the reporting framework | Ind AS applicability and inventory measurement scope. |
| 2 | Classify the inventory population | Interchangeability, project segregation, nature and use. |
| 3 | Select the permitted formula | Specific identification, FIFO or weighted average basis. |
| 4 | Check consistency across populations | Similar nature/use and reasons for any difference. |
| 5 | Validate opening layers | Quantity, eligible unit costs and prior closing records. |
| 6 | Capture receipt and issue chronology | Dated movements, returns and cut-off evidence. |
| 7 | Recalculate the cost allocation | Layer issues or quantity-weighted periodic/moving average. |
| 8 | Reconcile quantity and total cost | Opening plus receipts less issues equals closing. |
| 9 | Perform the separate NRV test | Supported selling/completion/sale-cost evidence. |
| 10 | Check financial-statement disclosure | Actual implemented formula and measurement policy. |
Sixteen practitioner FAQs
1. Which items use specific identification?
The non-interchangeable and segregated specific-project population stated in paragraph 23.
2. Is specific identification suitable for every fungible stock pool?
No. Paragraph 24 warns against its inappropriate use for ordinarily interchangeable items.
3. Which formulas does paragraph 25 permit for other inventory?
FIFO or weighted average.
4. Is LIFO included in that choice?
No.
5. Can similar nature-and-use inventories use arbitrary different formulas?
Paragraph 25 requires the same formula for that population.
6. Can a different nature or use justify a different formula?
Yes, where justified under the standard.
7. Is a different warehouse location alone sufficient?
No. Paragraph 26 rejects geography alone as sufficient justification.
8. Does a different tax rule alone justify another formula?
No, under the same paragraph.
9. Does FIFO necessarily prove actual physical dispatch order?
No. It is the stated cost-flow assumption; physical controls remain separate.
10. How is periodic weighted average calculated?
Matching available cost divided by matching available quantity for the period.
11. Can a moving average update on each shipment?
Paragraph 27 permits that approach depending on circumstances.
12. Must periodic and moving averages always match?
No. Intervening issues can produce different allocations.
13. Can unit prices be averaged without purchase quantities?
That is not the quantity-weighted working required by the assumed method.
14. Does correct cost allocation remove the NRV test?
No. Paragraph 9’s lower-of-cost-and-NRV requirement remains.
15. Must the cost formula be disclosed?
Paragraph 36(a) requires disclosure of measurement policies including the formula.
16. Does this calculation automatically determine taxable inventory value?
No. Assess applicable tax-computation requirements separately.
Conclusion
Select the permitted cost formula for the inventory’s nature and use, reproduce the receipt-and-issue calculation, and reconcile closing cost before the separate NRV test.