Accounting – What is Included in Inventory Cost?

Accounting - What is Included in Inventory Cost

Just like other businesses do, your company purchases inventory and sell it to its clients at a price greater than what the products costs. Note that inventory cost must include the costs associated with the order process, hold/store the inventory and all expenses incurred in administering any necessary paperwork. According to the Financial Reporting Standard 2 (Inventories), you should include the following costs in inventory cost.

Cost of purchase

The inventory purchase cost comprises the import duties (if you imported the products), the purchase price of the goods, and other related taxes. Note that the tax that your business can recover from the taxing authorities should not be included in the cost of purchase. Besides, you should include other costs such as transport costs, handling costs, and other costs that are directly associated with the acquisition of the inventory.

Note that the cost all products that are returned to the supplier should be deducted from the cost of purchase. Besides, all trade discounts should be subtracted and other after-sales services such as free transport should not be included in the cost of purchase.

Cost of conversion

If you own a manufacturing firm (Also see Accounting for Manufacturing Businesses), you must convert the raw materials into finished goods that you can sell to your customers. The cost of conversion of inventory include the cost of units of production such as labor and the allocation of variable and fixed production overheads that your business incurs when converting the raw materials into finished goods.

The fixed production overheads are the indirect expenses such as depreciation, maintenance of firm’s equipment and buildings, the administration costs, and more. Examples of variable production overheads include indirect labor costs. If your business incurs storage costs especially if you have to store the items before selling them to the customers, this cost should also be included in the inventory cost.

The cost of inventory for a service provider

Some service businesses normally have inventory. For such a business, the FRS 2 – Inventories requires you to measure the inventory at the cost of its production. These costs include the labor cost and other costs of personnel such as supervisory personnel that was directly involved in offering the service. Note that the cost of inventory for a service provider should not include the profit margin.

Determining the cost of inventory is an important task for every business and should be done accurately. Making mistakes can result in poor pricing of the products and this might affect your business negatively so you might also want to get an accounting firm in Singapore if you are not confident doing it right.