Stock (or inventory) is often the most significant asset a trading business holds. For a trading business it is their main source of earning revenue. In most cases stock on hand is valued at historical cost in the Balance Sheet, but how do we determine that cost? In many cases this is just the invoice price charged by the supplier. But in some cases there are other cost associated with the purchase of stock that need accounting for.
The value of stock in the Balance Sheet includes all costs incurred in order to bring stock into a condition and location ready for sale. However, in order to calculate the cost per item of stock, it is necessary to allocate these costs to individual units of stock.
All costs incurred in getting stock to saleable condition which can be allocated to individual units of stock on a logical basis. Three main elements include raw materials, labour, factory overheads.
All costs incurred for a period of time in getting stock to a saleable condition that can not be allocated to individual units of stock because there is no logical basis to do so. Sometimes classified into, marketing expenses, general (administrative) expenses and financial expenses.
For a more detailed overview have a look at my PowerPoint presentation for Year 12 Accounting on Stock Valuation.