A ltd. purchased raw materials consisting of 500 metal sheets to manufacture car bodies. Out of these metal sheets 50% is considered as waste to manufacture two car bodies. It also paid for freight charges to transport them to the factory. Where will that amount be included in the cost of inventory?
A. Cost of finished inventory
B. Cost of raw materials
C. Cost of work in progress
D. Cost of closing inventory
WIP includes opening WIP and freight charges will be carried to finished goods. However, the transport costs are neither period nor recurring costs but batch costs. If we can include it in WIP, the closing WIP will hold some of the charges and these charges will be absorbed into next batch WIP (truck and auto fares differ). It is prudent to include these costs into finished goods based on job costing to derive the correct selling price of the product. However, Indian cost accounting principle is suggesting to include it in WIP alone.
Purchases a/c 1000 (1 unit @ 1₹)
Freight a/c 100
To Bank a/c 1100
and
Opening WIP 2000
New WIP 1000
Freight 100
Total = 3100
Finished goods= 3050
so, based on FIFO, 50 closing stock WIP above is from new batch. Allocate 100 freight charges to 950 units and 50 units of closing WIP equally. In the next period, opening WIP will be absorbing new batch freight charges. In reporting both WIP and finished goods is correct.
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