Indirect labor and production supervisory labor; administrative costs; indirect materials and supplies; rework, scrap, and spoilage; storage and warehousing costs; purchasing costs; handling, processing, assembly, repacking costs; and quality control and inspection costs 3. Taxes (other than income taxes) 4. Deductible contributions to pension, profit-sharing, stock bonus, or annuity plans 5. Interest, but only for real property, long-lived property, or property requiring more than two years to produce Chapter 13, Exhibit 32
CCH Federal Taxation Basic Principles 43 of 88 H Once total additional §263A costs are identified, next step in costing inventory is to allocate these costs Direct capitalized costs: Associated with specific production activities and products and allocated to them accordingly Taxpayer may use any method which reasonably allocates such costs Indirect costs allocated to activities and products using one of three methods: a) Specific identification (costs are specifically identified with activities or products that directly benefit from the costs) b) Standard costing (costs are allocated to products based upon established standards) c) Burden rates (costs are allocated based on direct labor hours, direct labor costs, and similar expenses) Chapter 13, Exhibit 33
CCH Federal Taxation Basic Principles 44 of 88 H May elect to use to allocate costs under §263A Fully capitalize costs for: 1. Off-site storage and warehousing 2. Purchasing 3. Handling, processing, assembly Amount of mixed service costs (general and administrative costs) allocated requires two steps: 1. Determine amount of mixed service costs that are additional §263A costs 2. Allocate this amount to ending inventory Chapter 13, Exhibit 34a
CCH Federal Taxation Basic Principles 45 of 88 H Amount of mixed service costs included under §263A is determined by multiplying such costs by ratio of: 1. Total labor costs included in off-site, storage, purchasing, and handling cost to 2.Total labor costs incurred in taxpayer’s business, excluding the labor included in the mixed service costs Once amount is determined, then allocated to ending inventory by multiplying amount in ending inventory that was purchased during year by the ratio of 1. Total additional §263A costs to 2.Taxpayer’s total purchases during year Chapter 13, Exhibit 34b
X Co. uses FIFO for its inventory. During the year it incurred: Storage costs = $200,000, Purchasing costs = $300,000, and Handling and processing costs = $100,000 Labor costs included in amounts above = $180,000 Mixed service costs = $250,000 Total labor costs, excluding amounts included in mixed service costs = $2,000,000 • X’s beginning inventory (excluding additional Code Sec. 263A costs) = $1,000,000
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