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.

Inventoriable Costs vs. Period Costs

Inventoriable costs are those costs that can be assigned to inventory, and include merchandise purchased, direct materials, direct labor, freight in, and manufacturing overhead. These costs are initially recorded as an inventory asset, and are later charged to the cost of goods sold expense when they are sold. This approach allows a business to report the revenue from an inventory sale with the associated expense in the same period.

Period costs are consumed with the passage of time. For example, the salaries of the sales department’s employees are considered period costs, since they are not associated with any products. Instead, they are consumed over the compensation period, and are therefore charged to expense in the period incurred. There are many more period costs than inventoriable costs, including rent expense, accounting department expenses, utilities expense, and office supplies expense.