A firm incurred the following costs related to production during the past year:
Fixed production overhead costs
3.0
Raw materials costs
6.0 Labor costs
4.0
Freight-in costs for raw materials
1.0
Warehousing costs for finished goods
2.0
The total capitalized inventory cost for the year is closest to:
14.0.
16.0.
13.0.
I was thrown off by these “labor costs” because the curriculum differentiates between direct labor and labor as an input to conversion.
Broadly speaking, you can account for inventory one of two ways:
at marginal cost, usually for high volume process driven businesses where overheads per unit of output are low
at FAMC, or fully amortised manufacturing costs, for lower volume situations where both fixed and variable costs are included, per unit of output. Of course this is more complex, as you need a way to deal with pkanned vs actual cost/volume, as well as attribution of fixed costs across many products.
Seems in this case, they wanted you to used full actual costs (fixed +variable) but didn’t tell you.