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Warning: Incorrectly costing your inventory could cause financial disaster

by , 30 July 2014
The whole point of your business is to make a profit. This means you must ensure your selling price covers all of your production costs.

If it doesn't, your business is in danger. This is where valuating your inventory by working out the costs comes in.

You may be tempted to just take a rough guess at your inventory costs. This is a big mistake! If you incorrectly cost your inventory, it could lead to financial disaster...

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Your inventory costs must be correct so you can work out your ideal selling price

 
When you manufacture your products, you have to pay for:
 
- Raw materials;
- Machinery;
- Labour costs;
- Vat costs;
- Payments for your premises (rent); and
- Additional costs such as water and electricity.
 
If you don't correctly work out the inventory costs of each of these things, you won't know how much each product costs you to manufacture. If you don't have this information, you can't ensure your selling prices covers your cost of inventory and makes a profit. 
 
This means you could be selling your products at a loss and your company is going to run in to difficulty very soon.
 
So rather correctly work out your inventory costs by including these three types of costs into your calculations.
 

Three costs you must always add in your inventory valuation 

 
1. Cost of purchase 
This includes import duties, non-refundable taxes, transport and handling costs.
 
2. Costs of convenience 
This includes wages and manufacturing overheads such as production costs, running costs and factory maintenance.
 
3. Other costs involved in the delivery and maintenance of the good
 
If you ensure you take note of all these costs and they're all correct you can avoid the risk of selling your goods at a loss.
 

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