Question

pro packs, inc manufactures its own backpacks, marketed to customers primarily for camping and traveling needs. the company is reviewing its policy for capitalizing inventory costs and wants your help to determine whether the following costs should be capitalized as part of the cost of inventory. 1) Canvas used un the construction of the packs 2) zippers purchased from YKK (a supplier), including the cost of freight for the zippers to be shipped. 3) was paid to employers operating industrial sewing machines. 4) electricity utility bills related to operation of the plant 5) contract labor paid to update and maintain the company website, through which customers can directly place backpack orders. for each cost noted, explain your position and the FASB CODIFICATION source you consulted.

Answer 1

1) COST OF CANVAS USED WHILE CONSTRUCTION OF PACKS - Yes it should be recorded as inventory cost as the material used directly in the manufacturing of the product. Hence stock is maintained.

2) ZIPPERS PURCHASED FROM YKK INCLUDING COST OF FREIGHT - Only the cost of the zipper can be included as the cost of freight is an operational cost which will be reflected in the Income statement, not in Balancer Sheet.

3) PAYMENT OF EMPLOYERS WORKING IN SEWING MACHINE - It is a salary payment which again is recorded in the Income statement. It is not reflected in the balance sheet. So it won't be considered.

4)ELECTRICITY BILLS - This is an expense that also comes under operational cost. Hence it will be recorded only in the Income statement. So this doesn't come under inventory cost

5) PAYMENT OF CONTRACT LABOUR - It is a salary payment which again will be recorded in Income statement, not in Balance sheet. So this, not an inventory cost.

SOURCE:

https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176164204281&acceptedDisclaimer=true

https://asc.fasb.org/imageRoot/22/66710722.pdf