carrying costs

Examples of carrying costs in the following topics:

• Economic Order Quantity Technique

  • Economic order quantity is the order quantity that minimizes total inventory holding costs and ordering costs.
  • This is not the cost of goods), H = annual holding cost per unit (also known as carrying cost or storage cost) (warehouse space, refrigeration, insurance, etc., usually not related to the unit cost).
  • Total Cost = purchase cost + ordering cost + holding cost
  • Purchase cost: This is the variable cost of goods: purchase unit price × annual demand quantity.
  • Ordering cost: This is the cost of placing orders: each order has a fixed cost S, and we need to order D/Q times per year.

• Cost of Buildings

  • The cost of a building is its original purchase price or historical cost and includes any other related initial costs.
  • The cost of a building is its original purchase price or historical cost and includes any other related initial costs spent to put it into use.
  • Since buildings are subject to depreciation, their cost is adjusted by accumulated depreciation to arrive at their net carrying value on the balance sheet.
  • The building's net carrying value or net book value, on the balance sheet is $110,000.
  • The cost of a building can include construction costs and other costs incurred to put the building into use.

• Lower of Cost or Market

  • In lower of cost or market (LCM), inventory items are written down to market value when the market value is less than the cost of the items.
  • Ending inventory is normally stated at historical cost (what was paid to obtain it), but there are times when the original cost of the ending inventory is greater than the cost of replacement.
  • If the inventory has decreased in value below historical cost, then its carrying value is reduced and reported on the balance sheet.
  • Cost is primarily determined by either the average cost or the first-in, first-out method.
  • The replacement cost of last-in, first-out inventories exceeds carrying value by approximately USD 169 million.

• Cost of Equipment

  • The cost of equipment is the item's purchase price, or historical cost, plus other initial costs related to acquisition and asset use.
  • The equipment's cost is calculated by adding the item's purchase price, or historical cost, to the other costs related to acquiring the asset.
  • Since accounting standards state that an asset should be carried at the net book value, equipment is listed on the balance sheet at its historical cost amount.
  • The cost is then reduced by accumulated depreciation to arrive at a net carrying value or net book value.
  • The cost of equipment includes all costs paid to put the asset into use.

• Average Cost Method

  • Under the Average Cost Method, It is assumed that the cost of inventory is based on the average cost of the goods available for sale during the period.
  • There are two commonly used average cost methods: Simple Weighted Average Cost method and Moving-Average Cost method.
  • Each time, purchase costs are added to Beginning Inventory Cost to get Cost of Current Inventory.
  • The Weighted-Average Method of inventory costing is a means of costing ending inventory using a weighted-average unit cost.
  • The ending inventory is carried at this per unit cost.

• Reporting R&D Cost

  • R&D costs may be expensed.
  • In this case, the contract usually specifies that all direct costs, certain specific indirect costs, plus a profit element, should be reimbursed to the enterprise performing the R&D work.
  • Because reimbursement is expected, such R&D costs should be recorded as a receivable.
  • The costs associated with R&D activities and the accounting treatment accorded them are as follows: expense the entire costs, unless the items have alternative future uses (in other R&D projects or otherwise), then carry as inventory and allocate as consumed, or capitalize and depreciate as used.
  • Summarize how to report research and development costs on the financials statements

• The Cost of Preferred Stock

  • The cost of preferred stock is equal to the preferred dividend divided by the preferred stock price, plus the expected growth rate.
  • The cost of preferred stock is 13%.
  • Because preferred stock carries a differing amount of risk than other types of securities, we must calculate its asset specific cost of capital to work into our overall weighted average cost of capital.
  • If preferred dividend is known and fixed, we can use the following equation to calculate the cost of capital for preferred stock .
  • The cost of preferred stock is equal to the preferred dividend divided by the preferred stock price, plus the growth rate.

• The Cost of Common Equity

  • The cost of equity is the return on equity that is required in order to compensate investors for the risk they undertake.
  • While a firm's current cost of debt is relatively easy to determine from observation of interest rates in the capital markets, its current cost of equity is unobservable and must be estimated.
  • The CAPM shows that the cost of equity is equal to the risk free rate plus a premium expected for risk.
  • Another approach to calculating the cost of common stock is to add a risk premium to the cost of debt.
  • The risk premium is the additional rate that must be paid to common shareholders above what is paid to bond holders, given the amount of risk carried by the equity.

• Accounting Methodologies: Amortized Cost, Fair Value, and Equity

  • Due to different durations of holding and other factors, companies use several accounting methodologies, including amortized cost, fair value, and equity.
  • Held to maturity securities are reported at amortized cost less impairment.
  • subjective factors such as risk characteristics, cost of and return on capital and individually perceived utility.
  • The ownership of less than 20% creates an investment position carried at historic book or fair market value (if available for sale or held for trading) in the investor's balance sheet.
  • Explain the difference between amortized cost, fair value and the equity method for reporting debt securities

• Market Value vs. Book Value

  • In accounting, book value or carrying value is the value of an asset according to its balance sheet account balance.
  • An asset's initial book value is its its acquisition cost or the sum of allowable costs expended to put it into use.
  • In many cases, the carrying value of an asset and its market value will differ greatly.
  • Ways of measuring the value of assets on the balance sheet include: historical cost, market value or lower of cost or market.
  • Historical cost is typically the purchase price of the asset or the sum of certain costs expended to put the asset into use.