INVENTORY VALUATION

Divi Labs is a pharmaceutical company manufacturing generic compounds, nutraceutical ingredients,

and customs synthesis of API’s and intermediates for global innovation companies (Divislabs.com,
2018, p.4). It follows a Weighted Average Cost method for evaluating their inventory. Further in
India, most of the top pharmaceutical companies such as Cipla, Glenmark and Sunpharma also
employ Weighted Average Cost method for valuating their inventory (Glenmarkpharma.com, 2018,
p.147; Cipla.com, 2018, p.114; Sunpharma.com, 2018, p.69).

Divi Labs carries a significant number of inventories 128139 lakhs (2018) (Divislabs.com, 2018,
p.105). Since the inventory is very large the batches can get mixed up resulting in difficultly to
differentiate between different batches. Hence, weighted average cost method would be best
suited to provide accurate cost calculations, which may otherwise require additional staff time to
differentiate and track these products individually (Bayt.com, 2019).

The inventory position over the last two years has improved at a steady rate of 2.03%. The raw
material inventory has increased by 1.13%, WIP has increased by 1.5%, Finished goods by 1.08% and
Stores and Spares inventory by 2%. Approximately 55% of the inventory is WIP (70419 lakhs). Divi
produces large volume products such as Naproxen and Dextromethorphan by running the pant at
full capacity and stocks these products for sale. It is this reason why Divi carries significant amount of
WIP to be able to service large volume products (Divislabs.com, 2018, p.37).

Raw materials, WIP and traded and finished goods are all stated at the lower of cost, calculated on
weighted average basis and Net realizable value (Divislabs.com, 2018, p.94). The raw material must
further be accounted for as a marketing expense at the point where it is packaged for use as a
sample. Raw material should also be accounted for incessantly with the treatment of miscellaneous
R&D expense related to the product, when the material is sent to production for use in
manufacturing of API’s (PwC.com, 2017, p.52).

The costs of WIP and finished goods produced by Divi includes the direct materials, direct labour
and an appropriate proportion of fixed and variable overhead expense. Further the inventories are
valued on the basis of all other costs incurred in bringing the inventories to their present location
and conditions (Divislabs.com, 2018, p.94). In the unlikely case of scrapping of validation batches
produced by a plant, Divi must expense it as validation costs and should recognize it as a
component of R&D expense (PwC.com, 2017, p.51). The total R&D expense for Divi in 2017-18 was
4504 lakhs (Divislabs.com, 2018, p.67). Further segregation of R&D expense is not explicitly
mentioned.

Divi Labs has a significant amount of inventory. As per IAS 2 the firm should not carry inventory in
excess of the amount to realize from its sale or use. In cases of an unlikely impairment such as
suspended operations, patent expiration, regulatory requirements, etc the carrying value of raw
material inventory used to manufacture the drug might not be recoverable by Divi. In such cases Divi
must evaluate the reason of the recall, and check if raw materials have an alternative use or else
write it down to its NRV and be recognised in COGS or as R&D expense depending on criteria
(PwC.com, 2017, p.53).
References:
Divislabs.com. (2018). Annual Report. [online] Available at:
https://www.divislabs.com/Downloads/28th-Annual-Report%202017-18.pdf [Accessed 28 Jul. 2019].

Glenmarkpharma.com. (2018). Annual Report. [online] Available at:

http://www.glenmarkpharma.com/Glenmark-Online-AR-2017-18/pdf/Glenmark-AR-2018.pdf
[Accessed 28 Jul. 2019].

Sunpharmapharma.com. (2018). Annual Report. [online] Available at:

https://www.sunpharma.com/sites/default/files/SPLL-Financial-Statement-17-18.pdf [Accessed 28 Jul.
2019].

Cipla.com. (2018). Annual Report. [online] Available at:

https://www.cipla.com/uploads/investor/1500033215_Annual%20Report%202016-17.pdf [Accessed
27 Jul. 2019].

Bayt.com. (2019). Inventory Valuation in Pharmaceuticals. [online] Available at:

https://specialties.bayt.com/en/specialties/q/263674/what-could-be-the-most-suitable-inventory-
method-in-a-pharmaceutical-industries-a-lifo-b-fifo-c-lcm-d-fefo-e-average/ [Accessed 29 Jul. 2019].

PwC.com. (2017). IFRS: Issues and solutions for the pharmaceuticals and life sciences industries.
[online] Available at: https://specialties.bayt.com/en/specialties/q/263674/what-could-be-the-most-
suitable-inventory-method-in-a-pharmaceutical-industries-a-lifo-b-fifo-c-lcm-d-fefo-e-average/
[Accessed 29 Jul. 2019].