Buying, producing and storing inventory during the normal course of business means that you also have to initially price it and know what is and what is not included in the price. It would make sense to add all costs incurred while making or buying the product to the unit price, however it is not always so.

On initial recognition when goods held for sale are bought, the unit price should include all the following costs:

– purchase price;
– import duties and other non-recoverable taxes;
– transport;
– handling; and
– other costs directly attributable to the acquisition of finished goods, materials and services.

Note here that also all trade discounts, rebates and similar items shall also be deducted from the cost price when initially recognizing an item as goods held for sale.

Goods produced include in their unit price the following expenses:

– directly related production costs (i.e. direct labor, materials etc);
– systematic allocation of fixed and variable production overheads incurred in the production.
Now, those are the costs included in the unit price, however, there are some expense which although you might like to add there, are excluded from the unit price. Those expenses are:
– abnormal amounts of wasted materials, labor or other production costs;
– storage costs, unless they are necessary during the production;
– administrative overheads that do not contribute to bringing inventories to their present location and condition;
– selling expenses.

Inventory is easy to recognize and measure on the balance sheet if you keep in mind those simple rules – make sure all required costs are included and consider also the subsequent measurement.