Can someone explain this to me? I don't remember reading anything about this and it makes no sense:
Seafood Trading Co. commenced operations during the year as a large importer and exporter of seafood. The imports were all from one country overseas. The export sales were conducted as drop shipments and were merely transshipped at Seattle. Seafood Trading reported the following data:
Purchases during the year
$ 12.0 million
Shipping costs from overseas
1.5 million
Shipping costs to export customers
1.0 million
Inventory at year end
3.0 million
What amount of shipping costs should be included in Seafood Trading's year-end inventory valuation?
a. $625,000
b. $375,000
c. $0
d. $250,000
Explanation:
Choice “b” is correct. The $1.5 million in overseas shipping costs must be allocated between ending inventory and cost of goods sold at year end, as follows:
Beginning inventory
$ 0.0
Purchases
12.0
Goods available for sale
12.0
Ending inventory
3.0
Cost of goods sold
$ 9.0
So, of the inventory purchased during the year, 75% ($9/$12) was sold and 25% ($3/$12) remained in ending inventory at year end. Therefore, of the shipping costs from overseas, $1.125 million ($1.5 million x 75%) should be included in cost of goods sold and $375,000 ($1.5 million x 25%) should be included in ending inventory. The $1.0 million in shipping costs to export customers are a selling cost that will be included in SG&A expenses.
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