B2.618 Valuation of work in progress
It can be difficult to value WIP with accuracy as there could be many different types of WIP in various stages of completion. There are two accepted methods of valuing work in progress (other than on cessation, see below) at cost:
• on the basis of the cost of materials and labour, known as the direct cost method
• on the basis of the cost of materials and labour plus an equitable estimated proportion of the overheads, known as the on-cost method
In exceptional cases, however, where it can be satisfactorily established that the actual prime cost plus overheads exceed what is reasonably likely to be recovered under the terms of a particular contract, there would appear to be no reason why the cost should not be reduced to the proportionate part expected to be recovered under the contract.
Changing the basis of valuing WIP
HMRC does not have the right to substitute one valuation basis for another where they are both valid for tax purposes1. However, where a basis which is valid for tax purposes has been adopted in a taxpayer's accounts, the taxpayer cannot adopt a different basis to calculate the profit figure for tax purposes. A proper valuation depends on the correct application of accounting principles to the facts and must take into account the particular circumstances of the trade in question2.
In Duple Motor Bodies3, the appellant company carried on the
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