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?
Can someone please explain in words why this is calculated this way?
The shipping costs to export to customers are a selling expense and not included in inventory. Shipping costs or freight-in necessary to get the inventory in place to sell should be recorded in inventory. Seafood Trading should include a proportionate amount of the shipping costs of $1.5 million in ending inventory. The correct answer is that $375,000 in shipping costs [($3.0 million ÷ $12.0 million) × $1.5 million] should be included in the cost of ending inventory.
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