Which costs belong in the cost of stock, and which do not

The test

One question decides most cases: was this cost incurred in bringing the item to its present location and condition, ready for sale? If yes, it belongs in the cost of the stock. If it was incurred after that point, or in selling it, or in running the business generally, it does not.

Everything below follows from that sentence.

In

• The purchase price from the supplier, net of trade discounts and rebates.
• Import duties and other non-recoverable taxes.
• Inbound freight, insurance for the voyage, and inland transport to your premises.
• Clearing, port handling and agent fees.
• Handling costs incurred in getting goods to a saleable condition — repacking, labelling, assembly of a kit.

Out

• Storage of finished goods. Once an item is ready for sale, warehousing it is a period cost. (Storage that is a necessary part of production — ageing, curing — is a different matter.)
• Selling and distribution costs. Outbound delivery to a customer is a cost of selling, not of stock.
• Administrative overhead not related to bringing goods to condition.
• Abnormal waste. Normal, expected losses are absorbed into unit cost; a one-off spoiled shipment is an expense, not an asset.
• Recoverable taxes. See below, because this is the one that catches people.

Recoverable VAT is the common error

If you are VAT-registered and the input VAT on a purchase is claimable, that VAT is not part of what the goods cost you. You are going to get it back.

Booking stock at the gross invoice value inflates your inventory on the balance sheet and your cost of sales when it sells — by 15% of the net, on every line, every time. It is the single most common inventory costing error in a newly registered business, because the invoice total is right there and the net figure requires one division.

Worked, on one delivery

The unit cost is 950 birr. Someone booking the gross invoice — VAT included — arrives at 1,070 instead, a 12.6% overstatement. Add the warehouse rent on top and it reaches 1,130, or 18.9%. At a selling price of 1,200 birr, the correct margin is 20.8%; the first error reports 10.8% and makes a perfectly good line look like a problem.

Write the policy down

Not because anyone will read it, but because the person doing the data entry in eight months will not be you. A short list — these cost types go into unit cost, these are period costs, allocation is on this basis — is what keeps the figure consistent across shipments and across staff. Consistency matters more here than getting the marginal judgement calls exactly right.