Question

Academia Sporting Goods, is a manufacturer or work out apparel for professors who need to get back in shape. Academia incurred the following costs during the year:

Cost of raw materials 12,000,000

Direct labor conversion costs 25,000,000

Production overheads   5,000,000

Freight charges of raw materials 2,000,000

Storage costs for finished good 800,000

Abnormal wastage 80,000

Administrative overhead 100,000

Given there is no work in progress inventory at year end:

1) What costs are capitalized to inventory?

2) What costs are expensed to the income statement?

Capitalized 39,000,000 ; Expensed 5,980,000

Capitalized 44,100,000 ; Expensed 880,00

Capitalized 19,000,000 ; Expensed 25,980,000

Capitalized: 44,000,000 ; Expensed 980,000

Answer 1

(a) Cost of Inventory can include raw materials, work in process and finished goods. Cost to be Capitalised to Inventory are all Direct Costs incurred and Overhead costs that includes the costs associated with bringing the manufactured goods to Saleable form.

(b) Answer: Option (4) Capitalized: 44,000,000 ; Expensed 980,000

	Capitalised	Expensed	Reason
Cost of raw materials	12,000,000		Direct Cost in relation to bringing the Goods to Saleable Condition. Hence, Capitalised.
Direct labor conversion costs	25,000,000		Direct Cost in relation to bringing the Goods to Saleable Condition. Hence, Capitalised.
Production overheads	5,000,000		Direct Cost in relation to bringing the Goods to Saleable Condition. Hence, Capitalised.
Freight charges of raw materials	2,000,000		Direct Cost in relation to bringing the Goods to Saleable Condition. Hence, Capitalised.
Storage costs for finished good		800,000	Not directly relating to bringing the Inventory to saleable condition.
Abnormal wastage		80,000	This is the loss in excess of Normal Loss and can be avided, hence should not be capitalised.
Administrative overhead		100,000	Not directly associated with manufacturing goods to saleable condition.
Total	44,000,000	980,000