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When it comes to inventory checks, always include these three costs

by , 30 July 2014
Is your company running at a loss and you don't know why? Well have you ever thought that the problem comes from your inventory?

No, I don't mean your inventory is costing you too much. I mean you haven't correctly calculated your inventory costs. This means your selling price of your goods might not even cover the costs. That's why you're making a loss.

To fix this problem ensure you include these three costs in your inventory valuation...

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When you do your inventory valuation include these three costs

 
1. Cost of purchase
This includes the costs involved in getting your raw stock such as import duties, non-refundable taxes, transport and handling costs.
 
2. Cost of convenience 
You can split these into two groups:
- Direct labour costs which are the wages you pay each of your employees; and
- Manufacturing overheads which include direct materials and indirect materials (nails, glue, bolts and so on), indirect labour costs (plant supervisor wages), water and electricity, factory maintenance, depreciating machinery and factory rental.
 
3. Other costs 
These extra costs include the transport of your goods and the packaging material you have to buy to protect the goods while they're in transit. 
 
So what must you do with all of these costs?
 
Here's how to use these costs to work out your ideal selling price
 
You must add all of these expenses together to create your total inventory cost for each month. Then take your total number of goods you produced during the same month. Divide your total cost of inventory expenses by the number of items you produced.
 
This will show you your expenses per item. Now you can ensure your selling price covers all those expenses and brings in some profit.
 
By doing this in your inventory valuation you can be sure your company will never run at a loss.
 

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Three accounting record risk areas to watch out for
 
 
 
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