Historical CostHistorical cost refers to the appropriate combination of:
- The cost of purchase
- The cost of conversion and
- Other costs less discounts offered
Cost of purchase: Cost of purchase consists of the purchase price including duties and taxes, freight inwards and other expenses directly attributable to the acquisition.
Cost of conversion: Cost of conversion includes costs which are specifically attributable to units of production i.e., direct labour, direct expenses, sub contract charges etc.
Other costs: Costs other than production overheads are sometimes incurred to bring the inventory to their present location and condition, which are to be included in the cost of inventory. For example, expenditure incurred for designing a product for a specific customer.
Discount: A deduction from the usual cost of goods, typically given for prompt or advance payment or to a special category of buyers.