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Cost of Inventory- Products / Finished Goods




Cost of Inventory-Products for manufacturing company

Cost of Inventory for manufacturing company

The examples of manufacturing company are as follows.

  • Company manufactures and sells phones, computers, scanners, LDC
  • Company manufactures and sells cars, motor
  • Company manufactures and sells furniture
  • Company manufactures and sells TV

Cost of finished goods = cost of material + conversion cost

Cost of material = purchase price-trade discount-sale return and allowance+ freight + insurance + import taxation + Specific tax (if any) + port fee + clearance cost + other relevant costs

Note:

  • Settlement discount because of early payment is excluded cost of inventory, so it is other income.
  • VAT input is excluded cost of inventory if it can be claimed from VAT output when we sell inventories.

Conversion Cost- it included directs costs and production overheads. Direct cost included direct labor while Production overheads included heating and light, salary of supervisors, depreciation of plant, etc.

Our note:

  • Cost of material refer to direct materials for this case
  • Conversion costs are cost converting from direct materials to finished goods.

In practice, cost of finished goods= material + labour +overhead = specific cost + common cost 

Costs are excluded from cost of inventories:

  • Selling costs/marketing expense
  • Storage costs ( or storage cost of finished goods)
  • Abnormal waste of materials, labour or other costs
  • Administrative overheads.

Example 1

XYZ Company manufactures and sells Table A. The costs of manufacturing table are as follows.




Wood………………………………..$20

Other materials…………………..$2

Direct labor………………………..$10

Other Production overhead…..$5

Required:

Calculate cost of Table

Solution

Cost of finished goods = cost of material + conversion cost

Cost of finished goods = 20 + (2+10+5)=$37

Cost of Table A is $37.



Example 2

Your company manufactured three products A, B and C.

Product Produced Units
A 10,000
B 5,000
C 2,000

There are specific costs and common costs (absorption cost) for each products as follows:

The following costs are directly allocated ( specific costs) to each product.

Cost Product A Product B Product C
Material 20,000 7,000 8,000
Labour 10,000 12,000 9,000
Overhead 4,000 2,000 2,000
Total $34,000 $21,000 $19,000

Below are the common expenses and costs , and percentages/absorption used for three products and admin department.




————–

Required:

  1. Calculate total costs for Product A, B and C
  2. Cost per unit for Product A, B and C
  3. Admin Costs
  4. Other Expense

Solution 

The following notes:

1/ 10,000/17,000 x $10,000=5,882$
 2/ 10,000/17,000 x $3,000=1,765 $
3/ 10,000/17,000 x $1,000=588 $
4/ 8,000 x 40%= 3,200$
5/ 7,000 x 60%= 4,200 $
6/ 1,000 x 30% = 300$
7/ 3,000 x 20%= 600$
8/ abnormal cost is other expense

1.Calculate total costs for Product A, B and C




Total costs = material + labour +overhead = specific costs + common costs

Total Cost for Product A = $34,000 + $19,535 =$ 53,535

Total Cost for Product B =$21,000 + $9,818 = $30,818 

Total Cost for Product C =$19,000 + $8,347 = $27,347 

2.Cost per unit for Product A, B and C

Cost per unit = Total Costs for Each Product /Produced Units for Each Product

Cost per unit for Product A  =$ 53,535/10,000= $5.35 

Cost per unit for Product B = $30,818/5,000= $6.16 

Cost per unit for Product C =$27,347/ 2,000= $13.67 

3.Admin Costs

Admin costs = $2,300

4.Other Expense

Other expense = $2,000



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