Inventoriable cost and period cost

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Topics� News� Financial Advisors� Markets� Anxiety Index� Investing� Managing Wealth� ETFs & Mutual Funds� Election Center� Retirement� Personal Finance� Trading� Q3 Special Report��� Small Business� Back to School� Reference A:Costs of business are categorized as period costs or product costs as far as financial accounting is concerned. These categorizations occur on the basis of whether the expense is capitalized to the cost of saleable products.What are Product Costs?Costs incurred in the process of acquiring or manufacturing a product are considered product costs.

Since these costs are often treated as inventory and do not appear on a company's income statement until the final product is sold, you may sometimes see these referred to as "inventoriable costs." A classic manufacturing firm has product costs consisting of materials used in the production process, or direct materials; labor expenses that are directly tied to manufacturing; and indirect costs such as manufacturing overhead. These are general concepts; the actual field of assigning costs to inventory can be very complex.What are Period Costs?All costs not included in product costs are called period costs.

Since these costs are not involved in the production process, they are not treated differently on an income statement following a sale. Rather, they are treated as actual expenses in the period in which they arise, which is why they are called period costs.According to U.S. generally accepted accounting principles, or GAAP, all selling and administrative costs are treated as period costs.

Common examples of period costs include marketing expenses, rent, office depreciation and indirect labor. Even if physical inventories are composed of items that are treated as product costs, the actual administration of warehouses and inventory management expenses are considered period costs. Find out how to tell if a cost is a direct cost, why that's important and why direct costs don't tell the whole story about .

Read Answer >>� How is the marginal cost of production used to find an optimum production level? Understand more about production cost calculations, and specifically how the marginal cost of production is used to determine .

Read Answer >>� What are the different types of costs in cost accounting? Learn about the different types of costs associated with cost accounting, such as direct, indirect, fixed, variable and operating . Read Answer >>� Do production costs include the marginal cost of production? Learn more about marginal costs of production and production costs. Find out how businesses can use marginal cost calculations . Read Answer >>� How do fixed and variable costs each affect the marginal cost of production? Accountants' GuidebookAccounting Controls GuidebookAccounting for InventoryAccounting for ManagersAccounting Procedures GuidebookBookkeeping GuidebookBudgetingBusiness Ratios GuidebookCFO GuidebookClosing the BooksController GuidebookCorporate Cash ManagementCost Accounting FundamentalsCost Management GuidebookCredit & CollectionsEnterprise Risk ManagementFinancial AnalysisFixed Asset AccountingFraud ExaminationGAAP GuidebookIFRS GuidebookLean Accounting GuidebookMBA GuidebookMergers & AcquisitionsPayables ManagementPayroll ManagementPublic Company AccountingSmall Audit Practice SetTreasurer's Guidebook 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 CostsABC 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.Similar TermsInventoriable costs are also known as product costs.Related TopicsAbsorption costingHow to calculate cost per unitWhat are direct materials?What is a plantwide overhead rate?What is absorbed overhead? There are people who assume that product cost and period cost are synonymous due to little knowledge about the two.

Product Cost is the cost that�is attributable to the product, but Period Cost is just opposite to product cost, and so it cannot be apportioned to the product. If you are in search for the fundamental differences between product cost and period cost, then this is your perfect destination. Here, in this article we present you inventoriable cost and period cost the�distinguishing point amidst the two types of cost considering various parameters.

Have a look. Content: Product Cost Vs Period Cost� Comparison Chart� Definition� Key Differences� ConclusionComparison Chart Basis for ComparisonProduct CostPeriod CostMeaningThe cost that can be apportioned to the product is known as Product Cost.The cost that cannot be assigned to the product, but charged as an expense is known as Period cost.BasisVolumeTimeWhich cost is regarded as Product / Period Cost?Variable CostFixed CostAre these costs included in inventory valuation?YesNoComprises ofManufacturing or Production costNon-manufacturing cost, i.e.

office & administration, selling & distribution, etc.Part of Cost of ProductionYesNoExamplesCost of raw material, production overheads, depreciation on machinery, wages to labor, etc.Salary, rent, audit fees, depreciation on office assets etc. Definition of Product CostThe cost which is directly related to the buying and selling of the merchandise is known as Product Cost.

These costs are associated with the procurement and conversion of raw material to finished goods ready for sale. Simply put, the cost which is a part of the cost of production is product�cost. These costs can be apportioned to products. The cost is included in the valuation of inventory; that is why it is also known as Inventoriable costs.�The following are the objective of computing product cost:� It helps in the preparation of financial statement.� It should be calculated for the purpose of product pricing.Under different costing system, product cost is also different, as in absorption costing both fixed cost and variable cost are considered as Product�Cost.

On the other hand, in Marginal Costing only the variable cost is regarded as product cost. An example of such cost is the cost of material, labor, and overheads employed in manufacturing a table.

Definition of Period CostThe cost which cannot be allocated to the product, but belongs to a particular period is known as Period Cost.

These costs are charged against the sales�revenue for the accounting period in which they take place. Period Cost is based on time, i.e. the period in which the expenses arise. These costs occur during a financial year, but they are not considered at the time of valuing the inventory because they are not associated with the purchase and sale of goods.According to the Matching Principle, all expenses are matched with the revenue of a particular period. So, if the revenues are recognized for an accounting period, then the expenses are also taken into consideration irrespective of the actual movement of cash.

By virtue of this concept, period costs are also recorded and reported as actual expenses for the financial year.All the non-manufacturing costs like office and general expenses are considered as Period Cost like interest, salary, rent, advertisement, commission to salesman, depreciation of office assets, audit fees, etc. Key Differences Between Product Cost and Period CostThe following are the major differences between product cost and period cost:� Product Cost is the cost which can be directly assigned to the product.

Period Cost is the cost which relates to a particular accounting period.� Product Cost is based on volume, because they remain same in the unit price, but differ in the total value. On the other hand, time is taken as a basis�for period cost because as per the matching principle; the expenses should match the revenue and therefore, the costs are ascertained and charged in the accounting period in which they are incurred.� In general, the variable cost is considered as product cost because they change with the change in the activity level.

Conversely, the fixed cost is regarded as�period costs because they remain unchanged irrespective of the activity level.� Product Cost is included in the inventory valuation, which is just opposite in the case of Period Cost.� Product cost comprises of all the manufacturing and production costs, but Period Cost considers all the non-manufacturing costs like marketing, selling, and distribution, etc.ConclusionIn a nutshell, we can say that all the costs which are not product costs are period costs.

The simple difference between the two is that Product Cost is�a part of Cost of Production (COP) because it can be attributable to the products. On the other hand Period, cost is not a part of the manufacturing�process, and that is why the cost cannot be assigned to the products. Related Differences� Difference Between Direct Cost and Indir�� ACCA� FIA� DIPIFR� CIMA� ICAP� Excel� Excel Basics� Excel Formulas� Excel Charts� Excel Pivot Tables� Standards� International Accounting Standards (IASs)� International Financial Reporting Standards (IFRSs)� International Standards on Auditing (ISAs)� Online Courses� Financial Accounting� Cost and Management Accounting� English (UK) Company Law� English (UK) Contract Law� Business Analysis� Shop� Buy Excel Templates and Resources �� ACCA� FIA� DIPIFR� CIMA� ICAP� Excel� Excel Basics� Excel Formulas� Excel Charts� Excel Pivot Tables� Standards� International Accounting Standards (IASs)� International Financial Reporting Standards (IFRSs)� International Standards on Auditing (ISAs)� Online Courses� Financial Accounting� Cost and Management Accounting� English (UK) Company Law� English (UK) Contract Law� Business Analysis� Shop� Buy Excel Templates and Resources � ACCA - F2� Absorption and Marginal Costing� ACCA� ACCA - F3� Accounting Concepts & Conventions� CA� CAT� CAT - T2� CAT - T3� CAT - T6� CAT - T7� CIMA� CIMA C01� CIMA C02� Cost and Management Accounting� Cost Classification� FIA� FA2� FFA� Financial Accounting� Financial Statements of Sole Traders� FMA� IAS 2� Inventory� MA2� Module C� Module DIs �Cost of goods sold� a Product cost or a Period cost? Before we discuss under what heading should we classify cost of goods sold, let�s first of all clear out our minds for the terms inventoriable costs and period costs with a quick review.

You can the answer on difference between period costs and product costs in good detail here. I will be using the word Inventoriable cost for Product cost as it makes even more easier to remember the fact that costs that form part of inventory value are called inentoriable costs � an alternative term for product costInventoriable costs (Product cost) or Product costs are all such costs that form part of the inventory.These are basically such costs that relates directly to the products such as direct material costs, direct labour costs manufacturing overheads, carriage inwards and all such costs that contributes and are necessary to bring the inventory to their present location and condition. Period costs or non-inventoriable costs or nonmanufacturing overheads are all such costs that are not incurred in connection to the production.

Rather they are connected and measured in context of time. These costs do not play any role in producing the asset or bringing the asset to its present location and condition.Let�s come back to the question in hand.Cost of goods sold on the other hand is the product cost of goods sold in a particular accounting period or simply sum of inventoriable costs that has been expensed out in a specific accounting period.Now this is a bit tricky as some would say that before being cost of goods sold these were product costs so that is why it is product cost and some would say that as in the end cost of goods sold is charged in relation to a period therefore it is a period cost.Cost of goods sold is both inventoriable cost and period cost where product cost ended up being period cost also.

As firstly it was a product cost but as products are sold and with revenue recognized we have to record matching costs as well for the period i.e product cost. Therefore, cost of goods sold is now a period cost as well. It just depends on us whether we want to ignore or forget what cost of goods WAS before the goods were sold.But some would suggest that it WAS an inventoriable cost and after products are sold NOW it is a period cost and the product cost of unsold units of product is actually the product cost.

In other words follower of this school of thought suggest that inventory cost of units sold out is period cost where as inventory cost of units unsold is product cost as inventory costs of unit sold is reported in the Income Statement which relates to the period and inventory cost of units unsold is reported in the Statement of Financial Position (Balance Sheet) in which units are carried forward to the next accounting period.

And this does make sense as what cost of goods sold �was� is irrelevant at the time goods are sold and we should be concentrating what cost of goods sold �is� at the time of reporting � which is period cost.As I said, it just depends on the perspective that we are using to classify cost of goods sold either as product cost or inventoriable cost and period cost cost. Teaching professional business subjects to the students of FIA, ACCA, CIMA, CA etc.

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In order to post comments, please make sure JavaScript and Cookies are enabled, and reload the page. Click here for instructions on how to enable JavaScript in your browser. Who is behind PakAccou� Home� Corporate Finance� Financial Management� Investment Decisions� Financial Analysis� Working Capital Financing� Sources of Finance� Financial Leverage� Dividend Decisions� Financial Accounting� Mergers and Acquisitions� Corporate Restructuring� International Financial Management� Derivatives� Costing� Costing Terms� Budgeting� Site Map� Contact Us � Facebook� Twitter� Google+� Pinterest� LinkedIn� EmailInventoriable costs and period costs are also a type of classifications of costs.

Inventoriable costs can be defined as costs which become part of inventories such as raw material, work in progress and finished goods inventory present in the balance sheet of any business. On the other hand, period costs are all other costs that are not inventorial costs. Period costs are those costs which are incurred and expensed in Profit and Loss Statement in the period they are incurred. Inventoriable costs, in a manufacturing concern, are all direct material, direct labour, and manufacturing costs.

These costs are incurred while the product is being manufactured but all of these are not expensed to profit and loss account in the same period. These costs become part of 3 types of inventories and sit on the balance sheet. When these inventories become finished goods and sold, Inventoriable costs transform into the cost of goods sold and thereby a part of profit / loss statement.On the other hand, period costs, in a manufacturing concern, are all those costs which incurred and expensed to profit and loss account in the same period.

For example, administration cost, finance cost, and selling and distribution costs are period costs. These expenses do not give benefits in the future periods or are very difficult to evidence their benefit.

Therefore, these costs are expensed to P/L statement in the period they are incurred. In manufacturing concerns, all the direct material, labour and manufacturing expenses are Inventoriable costs and other costs such as administration cost, finance cost, and selling and distribution cost are period costs.In trading concerns, costs of acquisition of goods, which are sold in the same form, are considered inventorial costs.

These would include the purchase cost of goods, inward freight cost, handling, etc and all other costs which are necessary to bring goods in a position to be sold by the trader. Apart from these costs, all costs are the period cost for trading concerns.In a service concern, all the costs are considered period costs because there are no inventories in the service sector.Difference between Inventoriable Costs and Period CostsSr.

No.Inventoriable CostsPeriod Costs1These costs may be incurred in one period and expensed in another year.These costs are incurred and expensed in the same period.2These costs become part of any of the three inventories � raw material, work in progress and finished goods.These costs do not form part of any inventories.3Becomes part of the balance sheet in the form of inventories on the assets side.Do not become part of the balance sheet in any form.4These costs exist in manufacturing and trading concerns.These costs exist in manufacturing, trading, and service concerns.To conclude, we can say that the inventorial costs and period costs are differentiated because the matching concept of accounting.

Conceptual understanding of accounts says that we should record all those expenses in the P/L statements in the particular period which is related to the revenues of that particular period. Since, the benefit of inventorial costs are available to future periods also, the part of inventorial costs which benefits the future periods are taken to next period and are inventoried in the balance sheet.

On the other hand, the period costs normally tend to give benefit in the current period and no benefits of those expenses are normally available in the future period, these costs are matched to revenues of the same period. � Home� Corporate Finance� Financial Management� Investment Decisions� Financial Analysis� Working Capital Financing� Sources of Finance� Financial Leverage� Dividend Decisions� Financial Accounting� Mergers and Acquisitions� Corporate Restructuring� International Financial Management� Derivatives� Costing� Costing Terms� Budgeting� Site Map� Contact Us � Profit Maximization vs.

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Maximization� � Sources of Finance� Profit Maximization vs. Wealth Maximization� Difference between Lease Financing Vs. Hire Purchase� Capital Structure Theory � Modigliani and Miller (MM) ApproaWhat are inventoriable costs? Inventoriable costs are 1) the costs to purchase or manufacture products which will be resold, plus 2) the costs to get those products in place and ready for sale.

Inventoriable costs are also known as product costs.To illustrate, let's assume that a retailer purchases an item for resale by paying $20 to the supplier.

The item is purchased FOB shipping point, which means that the retailer must pay inventoriable cost and period cost freight from the supplier to its location. If that freight cost is $1, then the retailer's inventoriable cost is $21. Assuming this is the only item in the retailer's inventory, the retailer's balance sheet will report inventory at a cost of $21.

When the item is sold, the retailer's inventory will decrease by $21 and the $21 will be reported on the income statement as the cost of goods sold.In the case of a manufacturer, a product's inventoriable costs are the costs of the direct materials, direct labor and manufacturing overhead incurred in manufacturing the product. Related Q&A� Are transportation-in costs part of the cost of goods sold?� What is the difference between product costs and period costs?� What is direct labor?� What is manufacturing overhead and what does it include?� What are production costs?� What are direct materials? Latest Accounting Q&A� How should I study accounting?� What is an outstanding deposit?� What is the employer's Social Security tax rate for 2016?� What is the employee's Social Security tax rate for 2016?� What is the self-employed person's FICA tax rate for 2016?� What is the maximum amount of earnings subject to the Social Security tax in 2016?� What is a stockholder?� What is zero-based budgeting?Read all 1,087 Q&A After working as an accountant, consultant, and university accounting instructor for morethan 25 years, Harold Averkamp formed AccountingCoach in 2003.

His goal was toshare his knowledge and passion for teaching accounting with people throughout theworld at a very low cost. Read More. What is the difference between product costs and period costs?A manufacturer's product costs are the direct materials, direct labor, and manufacturing overhead used in making its products. (Manufacturing overhead is also referred to as factory overhead, indirect manufacturing costs, and burden.) The product costs of direct materials, direct labor, and manufacturing overhead are also " inventoriable" costs, since these are the necessary costs of manufacturing the products.Period costs are not a necessary part of the manufacturing process.

As a result, period costs cannot be assigned to the products or to the cost of inventory. The period costs are usually associated with the selling function of the business or its general administration.

The period costs are reported as expenses in the accounting period in which they 1) best match with revenues, 2) when they expire, or 3) in the current accounting period. In addition to the selling and general administrative expenses, most interest expense is a period expense. Related Q&A� What is the difference between prime costs and conversion costs?� In accounting, what is meant by relevant costs?� What are nonmanufacturing overhead costs?� Should a manufacturer's selling prices be based on costs?� Why is the distinction between product costs and period costs important?� What are conversion costs? Latest Accounting Q&A� How should I study accounting?� What is an outstanding deposit?� What is the employer's Social Security tax rate for 2016?� What is the employee's Social Security tax rate for 2016?� What is the self-employed person's FICA tax rate for 2016?� What is the maximum amount of earnings subject to the Social Security tax in 2016?� What is a stockholder?� What is zero-based budgeting?Read all 1,087 Q&A After working as an accountant, consultant, and university accounting instructor for morethan 25 years, Harold Averkamp formed AccountingCoach in 2003.

His goal was toshare his knowledge and passion for teaching accounting with people throughout theworld at a very low cost. Read More. What is the difference between product costs and period costs?A manufacturer's product costs are the direct materials, direct labor, and manufacturing overhead used in making its products.

(Manufacturing overhead is also referred to as factory overhead, indirect manufacturing costs, and burden.) The product costs of direct materials, direct labor, and manufacturing overhead are also " inventoriable" costs, since these are the necessary costs of manufacturing the products.Period costs are not a necessary part of the manufacturing process. As a result, period costs cannot be assigned to the products or to the cost of inventory.

The period costs are usually associated with the selling function of the business or its general administration. The period costs are reported as expenses in the accounting period in which they 1) best match with revenues, 2) when they expire, or 3) in the current accounting period. In addition to the selling and general administrative expenses, most interest expense is a period expense. Related Q&A� What is the difference between prime costs and conversion costs?� In accounting, what is meant by relevant costs?� What are nonmanufacturing overhead costs?� Should a manufacturer's selling prices be based on costs?� Why is the distinction between product costs and period costs important?� What are conversion costs? Latest Accounting Q&A� How should I study accounting?� What is an outstanding deposit?� What is the employer's Social Security tax rate for 2016?� What is the employee's Social Security tax rate for 2016?� What is the self-employed person's FICA tax rate for 2016?� What is the maximum amount of earnings subject to the Social Security tax in 2016?� What is a stockholder?� What is zero-based budgeting?Read all 1,087 Q&A After working as an accountant, consultant, and university accounting instructor for morethan 25 years, Harold Averkamp formed AccountingCoach in 2003.

His goal was toshare his knowledge and passion for teaching accounting with people throughout theworld at a very low cost. Read More. � Chapters 1-4 The Accounting Cycle� Chapter 1: Welcome to the World of Accounting� Chapter 2: Information Processing� Chapter 3: Income Measurement� Chapter 4: The Reporting Cycle� Chapters 5-8 Current Assets� Chapter 5: Special Issues for Merchants� Chapter 6: Cash and Highly-Liquid Investments� Chapter 7: Accounts Receivable� Chapter 8: Inventory� Chapters 9-11 Long-Term Assets� Chapter 9: Long-Term Investments� Chapter 10: Property, Plant, & Equipment� Chapter 11: Advanced PP&E Issues/Natural Resources/Intangibles� Chapters 12-14 Liabilities/Equities� Chapter 12: Current Liabilities and Employer Obligations� Chapter 13: Long-Term Obligations� Chapter 14: Corporate Equity Accounting� Chapters 15-16 Using Information� Chapter 15: Financial Reporting and Concepts� Chapter 16: Financial Analysis and the Statement of Cash Flows� Chapters 17-20 Managerial/Cost� Chapter 17: Introduction to Managerial Accounting� Chapter 18: Cost-Volume-Profit and Business Scalability� Chapter 19: Job Costing and Modern Cost Management Systems� Chapter 20: Process Costing and Activity-Based Costing� Chapters 21-24 Budgeting/Decisions� Chapter 21: Budgeting � Planning for Success� Chapter 22: Tools for Enterprise Performance Evaluation� Chapter 23: Reporting to Support Managerial Decisions� Chapter 24: Analytics for Managerial Decision Making � Chapters 1-4� Chapter 1: Welcome to the World of Accounting� Chapter 2: Information Processing� Chapter 3: Income Measurement� Chapter 4: The Reporting Cycle� Chapters 5-8� Chapter 5: Special Issues for Merchants� Chapter 6: Cash and Highly-Liquid Investments� Chapter 7: Accounts Receivable� Chapter 8: Inventory� Chapters 9-11� Chapter 9: Long-Term Investments� Chapter 10: Property, Plant, & Equipment� Chapter 11: Advanced PP&E Issues/Natural Resources/Intangibles� Chapters 12-14� Chapter 12: Current Liabilities and Employer Obligations� Chapter 13: Long-Term Obligations� Chapter 14: Corporate Equity Accounting� Chapters 15-16� Chapter 15: Financial Reporting and Concepts� Chapter 16: Financial Analysis and the Statement of Cash Flows� Chapters 17-20� Chapter 17: Introduction to Managerial Accounting� Chapter 18: Cost-Volume-Profit and Business Scalability� Chapter 19: Job Costing and Modern Cost Management Systems� Chapter 20: Process Costing and Activity-Based Costing� Chapters 21-24� Chapter 21: Budgeting � Planning for Success� Chapter 22: Tools for Enterprise Performance Evaluation� Chapter 23: Reporting to Support Managerial Decisions� Chapter 24: Analytics for Managerial Decision Making� About the Author� Mission Statement� Contact Us� Terms of Use� Privacy Policy