Explanation:

According to Accounting Standard-2 (AS-2), which deals with inventory valuation, the cost of inventory includes certain expenditures and excludes others:

1. Administrative overheads that do not contribute to bringing the inventories to their present location and condition - These are excluded from inventory costs, as they do not directly contribute to the production process.

2. Storage costs which are necessary in the production process prior to a further production stage - This is included, as such costs directly relate to the production process and contribute to bringing the inventory to its present location and condition.

3. Selling and distribution costs - These are excluded from inventory costs as they happen after the production process.

4. Duties and taxes paid on purchases, subsequently recoverable by the enterprise from the Tax Authorities - These are also excluded, as they are recoverable and not a net cost.

Option 2 (Storage costs which are necessary in the production process prior to a further production stage) is the correct choice