[jessanqi]

Hi, can anyone please kindly advise,

why the storage cost is not included? I remember the warehousing is included in the inventory.

Thank you in advance!!

The answer is B.

On August 1, 2014, Mendez Corporation purchased a new machine on a deferred payment basis. A down payment of $2,000 was made and 4 annual installments of $12,000 each are to be made beginning on September 1, 2014. The cash equivalent price of the machine was $46,000. Due to an employee strike, Mendez could not install the machine immediately, and thus incurred $600 of storage costs. Costs of installation (excluding the storage costs) amounted to $1,600. The amount to be capitalized as the cost of the machine is a. $46,000. b. $47,600. c. $48,200. d. $52,000

[Radez]

You only include costs to acquire it and make it ready for use. Storage costs are an overhead cost that is more closely related to operating efficiency than to the item itself. It is similar with inventory, where you only capitalize costs associated with getting inventory into a state and position of being ready to be picked, packed and shipped. Any additional costs, such as storage, would be period costs.

Warehousing is only included in inventory if it occurs at a stage prior to the inventory being ready for shipment, such as during an assembly process. I really don't think you continue to capitalize warehousing costs for finished goods. IE. your inventory doesn't increase in value the longer you hold it.

The FASB doesn't give specific guidance that I could find here, but IASB does. IAS 2.16 explicitly mentions storage costs as one of the things to exclude from inventory “unless those costs are necessary in the production process before a further production stage;”

Hope that helps.

[jessanqi]

Thank you so much for the explanation!!! 🙂

[Author]

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