Definition
Inventoriable Cost refers to all the expenses related to producing goods or providing services which are counted as assets until the goods are sold or the services are provided. These costs typically include materials, labor, and manufacturing overhead costs. Once the goods are sold or services rendered, these costs are then classified as Cost of Goods Sold (COGS) in the company’s income statement.
Key Takeaways
- Inventoriable Costs are the direct costs associated with the products or goods companies have available for sale. They usually include direct materials, direct labor, and manufacturing overheads.
- These costs are initially recorded as an asset (inventory) on the Balance Sheet. As the inventory is sold, the inventoriable costs are expensed as Cost of Goods Sold (COGS) on the Income Statement.
- Proper management of inventoriable costs is crucial to a business’s profitability and competitive advantage. Accounting for these costs correctly can also have significant tax implications.
Importance
Inventoriable cost is a critical concept in finance and accounting as it represents the costs involved in producing products that a company has in its inventory.
It includes costs related to the purchase of raw materials, direct labor, and manufacturing overheads.
By tracking and accurately categorizing these costs, companies can determine the accurate value of their inventory, which is essential for financial reporting, tax obligations, and business decision-making.
Having a clear understanding of inventoriable costs can serve as the basis for pricing strategies, revealing the lowest possible price a company can sell its goods without incurring a loss.
Thus, it plays a fundamental role in cost management, profitability analysis, and overall financial performance.
Explanation
Inventoriable cost, an essential concept in financial accounting, serves the primary purpose of assisting businesses accurately determine their profits and financial position. It aids business owners, shareholders, and other stakeholders in making well-informed decisions related to the company.
By considering inventoriable costs, enterprises can generate more precise figures for their gross profit and net income, which in turn, provide valuable insights into the company’s profitability and its efficiency in managing resources. Inventoriable costs are used in the valuation of a company’s inventory, which is a critical element on a firm’s balance sheet.
They include all costs related to getting the inventory prepared and ready for sale, such as purchase costs, conversion costs, and other costs incurred to bring inventory to its present location and condition. By factoring in all these costs, businesses can accurately attribute the associated expenses to the appropriate accounting periods.
It ensures the expenses recognized in the income statement are relevant to the revenue generated in the same period, complying with the matching principle in accounting and providing a clearer picture of a company’s financial health.
Examples of Inventoriable Cost
Sure, Inventoriable costs, also known as product costs, are the direct costs associated with producing goods that a company sells. They include all costs incurred to produce the goods or service that are then sold by the company. Here are three real-world examples:
Manufacturing Company: For a company that manufactures goods, inventoriable costs could include the raw materials used in production, direct labor costs for employees working on the production line, and manufacturing overhead costs such as factory rent, depreciation on manufacturing equipment, utilities for the factory etc.
Retail Business: In a retail business, the inventoriable costs would include the cost of purchased merchandise intended for resale, freight charges, and any direct costs like packaging or labeling associated with getting those goods ready for sale.
Food Industry: Within the food industry, a restaurant’s inventoriable costs would involve the cost of raw food ingredients, direct labor costs for cooks and other kitchen staff, and overhead costs related to preparing food such as cost of kitchen utilities and depreciation of kitchen equipment.
FAQs about Inventoriable Cost
1. What is an Inventoriable Cost?
Inventoriable costs refer to all the costs related to producing goods or services that are intended for sale. These costs typically include direct materials, direct labor, and manufacturing overheads.
2. How are Inventoriable Costs different from Period Costs?
Inventoriable costs are capitalised in the balance sheet until the goods are sold, whereas period costs are expensed in the income statement for the period in which they are incurred.
3. What is the significance of Inventoriable Costs in Financial Accounting?
In financial accounting, Inventoriable costs have significant impacts on a company’s profitability and inventory valuation, and eventually impact both the income statement and the balance sheet.
4. Can marketing costs be classified as Inventoriable Costs?
Generally, marketing and sales costs are not recognized as Inventoriable Costs, they are often viewed as period costs and are expensed in the period they are incurred.
5. Can freight costs be included in Inventoriable Costs?
Yes, if freight costs are incurred to bring inventory to its present location and condition, they can be included as part of Inventoriable Costs.
Related Entrepreneurship Terms
- Cost of Goods Sold (COGS)
- Direct Material Cost
- Overhead Cost
- Non-Inventoriable Cost
- Freight-in Cost
Sources for More Information
- Investopedia: It provides a wealth of information about finance and investing terms, including Inventoriable costs.
- Accounting Tools: This website offers detailed explanations and comprehensive guides about various accounting and finance topics, including Inventoriable costs.
- Corporate Finance Institute: A professional website providing online financial education, including topics on Inventoriable costs.
- My Accounting Course: A website that offers a comprehensive library of accounting lessons and tutorials, which covers the concept of Inventoriable costs.
