IAS 2 INVENTORIES: OTHER COSTS

8. OTHER COSTS

Other costs can only be included in the cost of inventory if they are incurred in bringing the inventories to their present location and condition.

These would include inward transport and storage prior to completion of production, and specific design work required for a special client.

In limited cases, borrowing costs can be included in the cost of inventories.

These are covered in IAS 23 Borrowing Costs. Where you buy goods on deferred settlement terms, and the price includes a financing element, that financing element is recognised as interest expense over the period of credit.

Example: purchase on long-term credit Your supplier offers you a cash price of $7.000 per unit, or one year’s credit at a price of $8.000 per unit. If you choose the credit terms, then only $7.000 per unit should be recorded as inventory. The remaining $1.000 per unit should be recorded as a finance expense.
	I/B	DR	CR
Accounts payable	I		8.000
Inventory	B	7.000
Finance costs	I	1.000
Purchase of one unit on long-term credit

COSTS EXCLUDED FROM INVENTORIES

Examples of costs expensed in the period that they are incurred are:

- Abnormal amounts of wasted materials, labour and other production costs.

- Storage costs for finished goods.

- General administration costs.

- Selling costs.