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Hi John!
I am a bit confused with what to included in the cost of Inventory. On the following question, why factory supervisors’s wages are included?
Which of the following costs may be included when arriving at the cost of finished goods inventory for inclusion in the financial statements of a manufacturing company?
1 Carriage inwards
2 Carriage outwards
3 Depreciation of factory plant
4 Finished goods storage costs
5 Factory supervisors’ wagesAns: 1, 3, 5.
Why in this case the selling expenses is added to the cost?
“The following items were included in this total cost, at cost:
1. 1000 items which had cost $18 each. These items were all sold in October 2012 for $15 each, with selling expenses of $800.
2. 5 items which had been in inventory since 1978 when they had been purchased for $100 each, were sold in October 2012 for $1000 each net of selling expense.
What figure for inventory should appear in the company’s statement of financial position September 2012?
Thank you!!!
In the first question, when we make our own inventory we must include all costs of production. 2 is not a production cost (delivery to customers is a distribution cost); 4 is not a cost of production (if the are finished goods, then again it is a selling and distribution cost). The others are all production costs.
In the second question, we do not add selling expenses to cost!!
Inventory must be valued at the lower of cost and NRV. For item 1, cost is 18000; NRV is 15000 – 800 = 14200. So it should be valued at 14,200. Since they are currently included at 18,000 the inventory needs reducing by the difference of 3,800.For item 2, cost is $500; NRV is $100,000. So these should be valued at cost and no adjustment is necessary.
The free lecture on inventory will help you!
Hmm you actually remove the selling cost in the second question.
Perfect.
Thank you very much for your time!
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