Financial reporting for inventory
ACCOUNTING FOR INVENTORY OR INVENTORY ACCOUNTING
WHAT ARE THE COSTS THAT ARE INCLUDED IN THE INVENTORY? CPA CFE Financial Reporting
The costs to be included in the inventory are the costs incurred from the point where the goods are purchased to the point where they are sold.Inventory cost
Before learning about accounting for inventory, we need to understand the types of inventory. There are two types of inventories in general
1) Merchandise Inventory
2) Manufacturing Inventory
Merchandise inventories are the goods purchased for reselling it. For this kind of inventory, any cost incurred to bring the inventory to its present location and condition should be included in the inventory cost. The meaning of present location and condition is that the inventory is brought to a location and brought to a condition or state where it can be sold.
Any recoveries, including costs that are recovered from the vendors from whom the inventory is purchased are usually netted against the cost of the inventory. Similarly, any shipping costs incurred, to ship the inventory to the customer's location are not included in the inventory as they are related to sales.
Examples of costs which are added to the merchandise inventory are as follows:
Cost of purchase of inventory
Shipping costs incurred to receive the merchandise
Import duties and any other unrecoverable taxes
If the entity is not purchasing goods from vendor and re-selling it, but it manufactures the product by itself, then few more costs are included in the cost of the inventory.
raw material cost
direct labor cost
Raw Material Costs
Raw material costs are same as the merchandise inventory, all costs incurred to bring the inventory to its present location and condition like, cost of purchase, shipping costs to receive the raw materials, import duties and other unrecoverable taxes are included in the cost of raw materials. (Note: It is to be noted here that only the unrecoverable taxes are included in the cost of raw materials. The taxes which can be recovered are not included)
Direct Labor Costs
Adding direct labor cost to the cost of inventory is pretty straight forward. Direct labor cost is added to the inventory as and when it is incurred.
The direct labor costs and the manufacturing overheads which are required to turn the raw materials into finished goods are called as conversion costs.
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