Inventoriable costs
/What are Inventoriable Costs?
Inventoriable costs are included in the cost of a product. For a manufacturer, these costs include direct materials, direct labor, freight in, and manufacturing overhead. 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. The major accounting frameworks, such as GAAP and IFRS, mandate that these costs be included in the cost of a product, rather than being charged to expense as incurred.
For a retailer, inventoriable costs include purchase costs, freight in, and any other costs required to bring them to the location and condition needed for their eventual sale.
Accounting for Inventoriable Costs
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 may be deferred to a later period.
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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.
FAQs
How do inventoriable costs differ from period costs?
Inventoriable costs are capitalized as part of inventory on the balance sheet and expensed as cost of goods sold when the inventory is sold. In contrast, period costs are expensed in the period in which they are incurred, regardless of sales activity. Period costs typically include selling, general, and administrative expenses that are not directly tied to production.
How does inventory valuation affect the recognition of inventoriable costs?
Inventory valuation determines how inventoriable costs move from inventory on the balance sheet to cost of goods sold on the income statement. When inventory is sold, the assigned cost becomes an expense. Different valuation methods change the timing and amount of cost recognition, affecting reported profit and inventory balances.
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