Inventory Cost Calculation for Butler Ltd.
What costs are incurred by Butler Ltd during the financial year?
The costs incurred by Butler Ltd during the financial year include raw materials, direct labor conversion costs, storage costs, recoverable goods and services tax, and selling costs.
What is the cost to be included in inventory?
A. $39 000;
B. $38 000;
C. $34 000;
D. $30.000.
Answer:
The cost of inventory of Butler Ltd. includes only the costs of raw materials and direct labor conversion, totaling $30,000.
Explanation: In accounting and business finance, the cost to be included in inventory consists of the expenses directly related to the production or purchase of a product. For Butler Ltd., these costs are the raw materials totaling $10,000 and direct labor conversion costs amounting to $20,000. Therefore, the sum to be included in inventory is $10,000 + $20,000 = $30,000.
Other costs such as storage costs amounting to $3,000, recoverable goods and services tax of $1,000, and selling costs totaling $5,000 are not part of the inventory costs. These expenditures are classified as period costs and are recognized as expenses in the accounting period in which they are incurred.
It is crucial for businesses to distinguish between inventory costs and period costs to accurately reflect the financial position of the company. By correctly identifying and accounting for the costs incurred, companies can make informed decisions to optimize their operations and profitability.