Definition of Inventoriable Costs
Inventoriable costs are:
- A retailer's cost of the goods (products) that it purchased for resale, and any additional cost to get the goods in place and ready for sale
- A manufacturer's costs to manufacture goods that will be sold, which consist of the costs of direct materials, direct labor, and manufacturing overhead
Examples of Inventoriable Costs
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 the freight from the supplier to its location. If the freight cost is $1, then the retailer's inventoriable cost of the item is $21.
[If 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 its income statement as the cost of goods sold.]
In the case of a manufacturer, assume one of its product's required the following costs: direct materials of $6, direct labor of $4, and manufacturing overhead of $7. This manufacturer's inventoriable cost (or product cost) is $17. The $17 will be part of the manufacturer's inventory until it is sold. When it is sold, the $17 will be removed from inventory and will become part of the manufacturer's cost of goods sold.