Cost of materials consumed, purchases and changes in inventories under Schedule III

In a Tally trading account, opening stock, purchases and closing stock sit together and produce one gross profit figure. Schedule III breaks that picture into three lines, and the split is where small-company drafts most often go wrong. This guide covers cost of materials consumed under Schedule III, purchases of stock-in-trade and changes in inventories of finished goods, work-in-progress and stock-in-trade: what each line contains, the sign convention, the broad-head notes, worked numbers for a manufacturer, a trader and a mixed business, and the slips to look for before the draft goes to the partner. It is part of our Schedule III guide. Ind AS companies follow Division II, which is not covered here.

The three lines on the face of the Statement of Profit and Loss

Part II of Schedule III (Division I) lists the expenses under item IV in this order: cost of materials consumed; purchases of stock-in-trade; changes in inventories of finished goods, work-in-progress and stock-in-trade; employee benefits expense; finance costs; depreciation and amortisation expense; other expenses. ICAI's Guidance Note on Division I (Revised January 2022, para 9.5) says the aggregate of each is shown on the face, with the detail in the notes.

Raw materials do not appear in the changes line. Their opening and closing balances are already used inside cost of materials consumed, so counting them again in changes in inventories would double-count them.

Cost of materials consumed under Schedule III: what goes in

The Guidance Note says this line applies to manufacturing companies. It defines raw materials practically, not by dictionary meaning: materials that physically enter into the composition of the finished product (para 9.5.1.3). Stores, fuel and spare parts do not, so they stay out. Consumption of stores and spare parts and power and fuel are disclosed separately under other expenses (Note 5(vi)); see other expenses under Schedule III. Further points from para 9.5.1:

• Packing materials. Include them if the company classifies them as raw materials, and then preferably describe the line as "raw materials including packaging materials consumed". Otherwise disclose their consumption separately (paras 9.5.1.1 and 9.5.1.4).
• Components and intermediates. Purchased ones are materials consumed; internally manufactured ones are excluded (para 9.5.1.1).
• Actual vs derived consumption. The derived figure (opening + purchases − closing) can hide losses and wastage. Actual consumption from issue records is preferred. Where that is not possible, the derived figure may be used, and the company decides whether a footnote should say so (para 9.5.1.5).
• Normal and abnormal loss. Shortages within the company's own reasonable norms can be part of consumption. Losses beyond the norms, or arising outside the manufacturing process, should be kept out (para 9.5.1.6).
• Process transfers. Where one department's output is the next department's input, internal transfers are disregarded (para 9.5.1.7).

In practice the cost of materials also follows AS 2's cost of purchase (para 7): purchase price, freight inwards and other directly attributable costs, less trade discounts and rebates. Duties and taxes are included only if they are not recoverable later from the taxing authorities.

Purchases of stock-in-trade

Stock-in-trade means goods bought with the intention of reselling them. The Guidance Note (para 9.5.2) draws the line clearly: semi-finished goods or materials bought for further processing go into cost of materials consumed, not into this line. A distributor's purchases, a manufacturer's bought-out goods sold as they are, and accessories bought and resold as they are alongside its own products are purchases of stock-in-trade. Steel bought by a fabricator is not.

Note 5(ii)(b) asks a trading company for purchases of goods traded in, under broad heads. Under Note 5(ii)(a)(2), a manufacturer discloses "goods purchased" under broad heads. The Guidance Note (para 10.7) reads that as goods purchased for trading, if any.

Changes in inventories of finished goods, WIP and stock-in-trade: the sign convention

The figure is opening minus closing. If stock fell, the result is positive and adds to expenses: the goods sold this year include goods made or bought last year. If stock rose, the result is negative, shown in brackets, and reduces expenses: part of this year's costs is carried forward in closing stock. Head the column "(Increase)/decrease" so the reader knows which way it runs. Per GN para 9.5.3, the note shows each class separately:

The closing figures must agree with the inventories note in the balance sheet, and this year's opening figures with last year's closing figures. If a figure was reclassified, for example from WIP to finished goods, reclassify the comparative too. For the balance sheet side, including goods in transit and the mode of valuation, see inventories under Schedule III.

What the notes must show: broad heads

Note 5(ii) of the General Instructions for the Statement of Profit and Loss requires, under broad heads, raw materials and goods purchased for manufacturing companies; purchases of traded goods for trading companies; and gross income from services for service companies. A company in more than one category may show purchases, sales, consumption of raw material and gross income from services under broad heads. Note 5(iii) adds work-in-progress under broad heads. The note to Note 5 says broad heads are decided by materiality and true and fair view.

The Guidance Note (para 10.7) reads this as follows: no quantitative details are needed; on a conservative reading, a manufacturer discloses consumption of major raw materials and goods purchased for trading; disclosure of major items of opening and closing stock is suggested but not mandatory; and sales of finished goods should also be shown under broad heads. About 10% of the total is normally an acceptable threshold for a head, though another threshold may be used if it gives a true and fair view. Para 10.8 suggests a format listing consumption by major item; combined with the consumption working, the note can look like this:

Two more notes concern materials. A company that imports raw materials gives their CIF value (Note 5(viii)(a)). Note 5(viii)(c) asks for the value of imported and indigenous raw materials, spare parts and components consumed, each with its percentage of total consumption; the Guidance Note (para 11.3.5) reads imported as imported directly or indirectly by the company, not goods of foreign origin bought locally, and the total should agree with the consumption in the Statement of Profit and Loss.

Worked examples: manufacturer, trader and mixed business

1. Manufacturer. Example Castings Pvt Ltd has the raw material figures in Note 20 above, plus finished goods of ₹35,00,000 at the start and ₹28,00,000 at the end, and WIP of ₹12,00,000 at the start and ₹18,00,000 at the end. Cost of materials consumed is ₹5,04,00,000. Changes in inventories are ₹7,00,000 (FG decrease) less ₹6,00,000 (WIP increase), a net decrease of ₹1,00,000. Total material-related cost on the face is ₹5,05,00,000.

2. Trader. Example Tiles Pvt Ltd has opening stock-in-trade of ₹60,00,000, purchases of ₹7,20,00,000 (tiles ₹4,10,00,000; sanitaryware ₹2,30,00,000; others ₹80,00,000) and closing stock of ₹75,00,000. The face shows purchases of stock-in-trade ₹7,20,00,000 and changes in inventories ₹(15,00,000), so cost of goods sold is ₹7,05,00,000. With sales of ₹8,40,00,000, gross margin is ₹1,35,00,000, or 16.1%. There is no cost of materials consumed line; write "—" or leave it out rather than forcing a figure into it.

3. Mixed business. Suppose Example Castings also buys pipe fittings for resale: purchases ₹45,00,000, opening stock-in-trade ₹6,00,000, closing ₹8,00,000. The face of the 2025-26 statement then reads:

The stock-in-trade increase of ₹2,00,000 turns the net change from a ₹1,00,000 decrease into a ₹1,00,000 increase. These are the Note 22 figures shown earlier.

Common slips in small-company files

• Closing stock entered in purchases. Where stock is not maintained in Tally, closing stock is sometimes passed as a journal crediting the purchase ledger. Purchases are then understated, the broad-head note is wrong, and the balance sheet may pick up the stock a second time. Keep purchases at the actual purchases and take stock through the stock-in-hand figures.
• Sign reversed. An increase in stock shown as a positive expense overstates expenses by twice the change. Check that opening + purchases − closing agrees with the trading account's cost of goods sold.
• Stock transfers. Transfers between a company's own branches or units, especially between GST registrations where the transfer is invoiced with GST, often sit in Tally as both sales and purchases. They are not purchases from outside. Remove both sides before drafting; the Guidance Note's principle that internal transfers are disregarded (para 9.5.1.7) points the same way.
• GST in purchases. Input tax credit that the company can use belongs in the GST receivable ledgers, not in purchase cost (AS 2 para 7). GST that cannot be recovered, such as blocked credit or credit permanently reversed for exempt supplies, is part of cost. Purchases loaded with recoverable GST inflate both consumption and closing stock.
• Wrong line. Materials for processing booked as stock-in-trade; stores, spares or fuel counted in raw materials; freight inwards left in other expenses while closing stock is valued including it.
• Opening does not agree. Opening stock should equal last year's audited closing stock, class by class. A difference usually means a post-audit adjustment that was never passed in the books.

Linking the lines to inventories and gross margin analytics

Once the three lines are right, they make the year-end analytics easy. Schedule III does not prescribe a gross margin ratio, but the material cost to revenue percentage is a standard analytical check. For the mixed example, with revenue from operations of ₹8,10,00,000, material and goods cost is 67.7% of revenue. Compare it with the previous year and with the monthly pattern. Before a sharp move is accepted as a real change in margin, rule out a cut-off error, a change in stock valuation or a misclassified ledger. The inventory turnover ratio, one of the eleven Schedule III ratios, uses cost of goods sold or sales over average inventory (Guidance Note, Annexure B). For the trader, that is ₹7,05,00,000 ÷ ₹67,50,000 = 10.4 times. Its variance and reasons are covered in Schedule III ratios and the 25% variance, and the wider year-on-year review in analytical review under SA 520. If the cost lines are drafted by Tally group, check the purchase and stock ledgers first; mapping Tally groups to Schedule III covers where each ledger belongs.

Frequently asked questions

Sources

• Companies Act, 2013 — Schedule III, Division I, Part II (Statement of Profit and Loss) and General Instructions, Note 5(ii), (iii), (vi) and (viii) (India Code, amended text)
• Schedule III amendment — G.S.R. 207(E), 24 March 2021 (Gazette)
• ICAI — Guidance Note on Division I – Non Ind AS Schedule III to the Companies Act, 2013 (Revised January 2022), paras 8.8.2, 9.5, 9.5.1–9.5.3, 10.5–10.8, 11.3 and Annexure B
• ICAI — Accounting Standard (AS) 2, Valuation of Inventories, paras 6, 7, 13 and 26

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