Why is insurance included?

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  • #3162861
    animalwithin
    Participant

    I don't understand why insurance is counted as part of inventory in the following question below. I know that if we have insurance for the inventory whilst it is in transit, that gets capitalized as part of inventory but since when is insurance on the equipment that the inventory is manufactured on capitalized as part of the inventory?

    A company manufactured 1,000 units of product during the year and sold 800 units. Costs incurred during the current year are as follows:

    Direct materials and direct labor $7,000
    Indirect materials and indirect labor $2,000
    Insurance on manufacturing equipment $3,000
    Advertising $1,000
    What amount should be reported as inventory in the company's year-end balance sheet?

    #3163545
    water
    Participant

    I think because it goes into the cost of manufacturing inventory it gets capitalized. It is indirect factory overhead which is considered a manufacturing cost. Don't know if you are studying FAR but that's going by BEC logic.

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    #3164082
    animalwithin
    Participant

    I am studying FAR. I guess the key word is “manufacturing” since it's apparently a manufacturing company.

    #3164133
    DS
    Participant

    Insurance on factory equipment is a part of fixed manufacturing overhead. Under absorption costing required by GAAP, all manufacturing overhead must be included in the cost of inventory.

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    Foobar
    #3167268
    Yousef
    Participant

    All costs incurred to run the factory including its equipments to produce a product have to be capitalized to the inventory cost. These costs will fall into one of three categories, either direct material(DM), direct labor(DL) or manufacturing overhead. All costs other than DM and DL are considered overhead which is part of inventory cost. Good luck with your exam.

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    If there is a will there is a way.
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