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Never include these four costs in your inventory

by , 30 July 2014
Do your customers ever complain that your prices are too high? You probably think your prices are just fine because they have to cover your inventory costs.

While you're right, your selling price could still be too high.

You see, just like you have to include the right costs in your inventory valuation, you also need to avoid adding the wrong ones. Otherwise you'll push up the cost of your inventory higher than what it should be. To ensure your prices are accurate and fair, never include these four items in your inventory valuation...

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Never include these four items in your inventory valuation to ensure your final selling price is fair

1. Abnormal waste – These expenses happen when there are unexpected problems during your production process. For example, if a machine breaks and you must pay to fix it. This is a running cost of the business and not a cost of manufacturing your product.
2. Storage costs – These are unrelated to the production process. For example, the cost of rental a storage container to store your products before you sell them.
3. Administrative overheads – For example, office equipment like stationery, insurance, salaries for your office staff or any expenses not related to the production process.
4. Selling costs – These are the costs you must pay to ensure your products sell. For example, sales commissions and advertising expenses. 
All of these expenses are flexible. This means you may have to pay them one month but not the next. And you can't include these expenses in your inventory valuation because they aren't constant.
Your inventory cost must only include expenses that you pay each month to actually manufacture your goods. Otherwise, your customers will be right when they say your prices are too high.

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