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The cost of inventory should include all costs of pruchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
Cost of purchase includes: import duties, other taxes and transport costs. The discount can be deducted.
For manufactured goods or work in progress, cost must include direct labour and an allocation of fixed and variable overheads. The allocation of fixed overheads needs to be based on the normal level of production, otherwise the cost of inventory could be higher to lower than it should be.
And you should know the overhead expenses which must be excluded are: selling costs, storage costs, abnormal wastage of materials, labour or other production costs, administrative overheads.
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