Definition of Inventoriable Costs
Inventoriable costs refer to all costs that are included in the valuation of a company’s inventory. These costs encompass both fixed and variable production costs incurred up to the point in time when the goods are ready for sale, but they explicitly exclude selling and distribution expenses. Inventoriable costs are also known as product costs and are used in the calculation of the cost of goods sold (COGS) for financial reporting and tax purposes.
Key Components:
- Fixed Production Costs: These are the costs that remain constant regardless of the production volume, such as depreciation of factory equipment, lease payments for factory space, and salaries of permanent staff.
- Variable Production Costs: These costs vary directly with the level of production, including direct material costs, direct labor costs, and variable manufacturing overheads.
Examples of Inventoriable Costs
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Direct Materials:
- Example: The cost of raw materials used in the production of goods, like steel for car manufacturing.
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Direct Labor:
- Example: Wages paid to factory workers who are directly involved in the manufacturing process.
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Manufacturing Overheads:
- Example: Utility costs (e.g., electricity for the factory) that are necessary for the production process.
Non-Inventoriable Costs
- Selling Costs:
- Example: Salaries of sales personnel and advertising expenses.
- Distribution Costs:
- Example: Costs incurred to deliver the products to customers.
Frequently Asked Questions
What distinguishes inventoriable costs from period costs?
Inventoriable costs are capitalized as part of inventory and are expensed as cost of goods sold when the inventory is sold. Period costs, on the other hand, are expensed in the period in which they are incurred and include selling, general, and administrative expenses.
Why are selling and distribution costs excluded from inventoriable costs?
Selling and distribution costs do not contribute to the production of goods. They are incurred after the manufacturing process is complete and are therefore treated as period costs, not product costs.
How do inventoriable costs impact financial statements?
When inventories are recorded, inventoriable costs are capitalized as an asset on the balance sheet. When the inventory is sold, these costs are transferred to the income statement as a part of the cost of goods sold, reducing overall gross profit.
Can packaging costs be considered inventoriable costs?
Yes, if the packaging is necessary to get the product ready for sale, then the costs are included as part of inventoriable costs.
Are administrative costs considered inventoriable costs?
No, administrative costs are period costs and are expensed in the period in which they are incurred.
Related Terms
Cost of Goods Sold (COGS)
The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the product. It excludes indirect expenses such as distribution costs.
Fixed Costs
Fixed costs are business expenses that are not dependent on the level of goods or services produced. Examples include rent, salaries, and utilities like electricity and water.
Variable Costs
Variable costs vary directly with the level of production. Examples include raw materials and direct labor costs.
Period Costs
Period costs are all costs on the income statement other than the cost of goods sold. Examples include selling expenses, administrative expenses, and other non-manufacturing costs.
Work In Progress (WIP)
Work in progress refers to partially finished goods within an inventory leaving them as an asset on the balance sheet.
References
- Investopedia: What are Inventoriable Costs?
- Accounting Coach: Inventoriable Costs
- Corporate Finance Institute: Inventoriable Costs
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- “Accounting Made Simple” by Mike Piper
- “Financial and Managerial Accounting” by Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello
Accounting Basics: Inventoriable Costs Fundamentals Quiz
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