Material Cost & Inventoriable Cost Fundamentals Revision in 5 Minutes

When calculating inventory levels and material costs, certain steps and components are crucial to ensure accuracy. Let’s break down the process clearly:

1. Initial Price Calculation

The starting point is the list price or invoice price. From this, we deduct:

• Trade discounts (including quantity discounts).
• Government grants, subsidies, or incentives related to the purchase of raw materials.

Next, we add applicable taxes:

• IGST, SGST (State GST) or CGST (Central GST) are added only if input credit is not available. If input credit is available, taxes will not be included in the inventory cost.

Watch the Video and Revise All Concepts within 5 Minutes from 01:00 Min to 06:00 Min

2. Import Duties and Charges

For materials bought from foreign sources, add:

• Import duty or custom duty, calculated based on the net invoice price, converted into Rupees.
• Packing charges and costs associated with raw material containers.
• Loading and unloading charges.
• Transit Insurance Premium
• Transportation fees.
• Commission or brokerage payable on material purchase.

3. Adjustments for Returnable Value

If there’s any returnable value from empty packaging (like empty drums or boxes), deduct that from the total cost. For instance, if empty containers have a market value, reduce the material cost accordingly.

Road Tax and Toll Tax will be added.

4. Exclusions

• Cash discounts from suppliers are not reduced from the inventory cost. Cash discounts are treated as interest income, not a reduction in purchase cost.
• Any damage penalties or fines are also not included in the purchase cost.

5. Normal Loss Handling

When there’s normal loss (like evaporation, shrinkage, or breakage during transit), it is reflected by inflating the cost of the remaining inventory. For example: If 1000 liters of a material were purchased and 100 liters evaporate during transit, we distribute the cost over the remaining 900 liters. The cost of lost material is charged as a normal loss in the accounting records.

Download September 2024 Exam RTP Now:

https://shop.igpinstitute.org/insight/wp-content/uploads/2024/09/rtp-september-2024-exams.pdf