Inventoriable costs are all costs that can be assigned to produced goods, rather than being charged to expense as incurred. These costs are considered to be the cost of a product. Once an inventory item is consumed through sale to a customer or disposal in some other way, the cost of this inventory asset is charged to expense.
Thus, inventoriable costs are initially recorded as assets and appear on the balance sheet as such, and are eventually charged to expense, moving from the balance sheet to the cost of goods sold expense line item in the income statement. This means it is possible that inventoriable costs may not be charged to expense in the period in which they were originally incurred; instead, they are deferred to a later period.
Inventoriable costs include the following items:
- Direct materials
- Direct labor
- Freight in
- Manufacturing overhead (both fixed and variable)
Manufacturing overhead can include such costs as equipment depreciation, rent on the factory building, production management salaries, materials management staff compensation, factory utilities, maintenance parts, and so forth.
Conceptually, inventoriable costs are the costs incurred to obtain inventory items, as well as to bring them to the location and condition required for their eventual sale.
Example of Inventoriable Costs
ABC International wants to buy refrigerators in China, ship them to Peru, and sell them in its store in Lima. The purchase cost of the refrigerators, as well as the cost to ship them from China to Peru, to pay import fees in Peru, and to ship them to the store for sale are all inventoriable costs.
Inventoriable costs are also known as product costs.