Question

Which cost elements are included in inventory? What practical problems arise by including the costs of such elements? Provide example.

Answer 1

Cost elements included in the inventory are:

Direct Labor - Direct labor is recorded as employee hour utilized or machine hours to produce one unit of inventory.

Direct Materials - Direct materials included in the finished goods inventory include all raw materials needed for production.

Overhead - All expenses that are directly or indirectly related to the production of finished goods are included in this.

Carrying costs - Carrying costs are expenses incurred in stocking inventory.

Practical problems arising by including the cost of such elements are:

First, inventory cost management is itself a difficult  problem. For example, while including costs, it must be checked that all the costs are either pre tax or after tax.
Secondly, real cost of inventory include many elements and goes far beyond cost of goods sold and raw materials.