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Warning: Use these tips to cost your company's inventory correctly or your business could go under!

by , 08 April 2013
American organic grocery store chain, Fairway has announced their intention to list on the US stock market. But it hasn't been easy to come up with its initial listing price. Because Fairway requires an extensive supply chain system, it gets suppliers to deliver the majority of its perishables directly to the stores, rather than storing them in warehouses, reports investorplace.com. This helps them improve freshness and lowers inventory costs for each of the chains. It's an accounting nightmare. But accounting for your company's inventory doesn't have to be a headache - if you do it right...

'It's important to cost inventory correctly so that when you set the selling price for your product you'll cover all of your costs as well as make a profit,' warns the Practical Accountancy Loose Leaf.

'If you don't include all relevant costs into your inventory valuation correctly, you could sell your product below its actual cost which will result in a loss,' the article continues.

And we all know that making a large financial loss in the current economic could result in your company having to shut down. This often happens to small businesses when goods go up and they fail to price these increases in to ensure their profitability isn't affected.

Don't make this mistake! Ensure you include these three costs in your company's inventory valuation.

Consider these three costs when valuating company inventory

According to the Practical Accountancy Loose Leaf your cost of inventories should include the following three things:

  1. Direct material (Cost of purchase): This includes any raw materials that become a component of the finished product (i.e. when manufacturing wooden desks – the wood is considered a direct material).
  2. Direct labour (Cost of conversion): Wages earned by employees who worked directly on the product.
  3. Manufacturing overheads (Cost of conversion): This must include all production costs other than direct material and direct labour. For example, for your wood product indirect material would include nails, glue, electricity, factory maintenance, depreciation on machinery, etc. Indirect labour would include costs like your plant supervisor's salary.

By remembering to include all three costs in your inventory valuation, you'll be able to ensure your company makes a profit on the goods it sells. And remember to speak to your boss about adjusting prices if price hikes (like electricity and transport) affect your company's bottom line.

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Warning: Use these tips to cost your company's inventory correctly or your business could go under!
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