Question

Provide what constitutes inventoriable costs in the study of management accounting.   [8 marks]

Answer 1

Inventoriable cost is the total direct expense incurred by a manufacturing firm that includes a) cost related to the purchase of inventory (raw material, WIP, Finished Goods) and b) cost that is incurred to manufacture the goods till the point of sale.

It refers to all costs incurred to obtain or produce the end-products. Apply these costs to the products the company produces and sells. The cost of raw materials, direct labor, and part of overhead are all examples.

Before the products are sold, these costs are recorded in inventory accounts on the balance sheet and are treated like assets. You can also use product costs instead. When the products are sold, expense these costs as costs of goods sold on the income statement.

Inventoriable expenses are remembered for the expense of an item. For a producer, these expenses incorporate direct materials, direct work, cargo in, and overhead. For a retailer, inventoriable expenses are buy costs, cargo in, and some other costs required to carry them to the area and condition required for their possible deal. When a stock thing is devoured through deal to a client or removal in some other manner, the expense of this stock resource is charged to cost. Hence, inventoriable expenses are at first recorded as resources and show up on the accounting report in that capacity, and are in the long run charged to cost, moving from the monetary record to the expense of products sold cost detail in the pay explanation. This implies it is conceivable that inventoriable expenses may not be charged to cost in the period in which they were initially brought about; rather, they might be conceded to a later period.

Assembling overhead can incorporate such expenses as gear deterioration, lease on the manufacturing plant building, creation the board pay rates, materials the executives staff remuneration, plant utilities, upkeep parts, etc.

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.

Product unit cost = (Total direct labor + Total direct material + Consumable supplies + Freight-in + Total allocated overhead) /Total number of units.

Direct materials –Refers to every crude material and sub-gatherings incorporated with the last item.

Direct labor –Refers to the expenses of activity acquired when representatives connect straightforwardly in the get together and creation of an item that is doled out either to a particular item, cost focus, or work request. For example, machine administrators in a creation line, representatives at the sequential construction systems, or even specialized officials working and checking creation activities.

Freight in –Refers to the expenses related with the transportation of creation inputs. It is charged when products are conveyed from the provider to the maker.

Manufacturing overheads –Refers to the assembling costs other than factor costs that a producer brings about during a given time of creation. They are fixed costs that are straightforwardly identified with the assembling of an item. They incorporate all cost identified with direct material, and direct work. For instance, the expense of power required to work producing hardware is an assembling overhead expense.

Let’s say Company X assembles laptops for resell in Ontario, California. The company imports different parts of the computers from various parts of the world and different manufacturers. For example, the displays may be from CoolTouch Monitors, motherboards and casings from China, hard disks from Seagate, processors and RAM from Intel, with the rest of the components made in-house.

To aggregate the inventoriable costs of manufacturing, the manufacturer must account for all costs incurred from the point of acquisition up to the point when the goods are brought to their warehouse. This includes all costs incurred before and during assembly, such as the cost of acquiring each part, direct labor, freight-in, and any other manufacturing overheads.

Therefore, if producing 3,000 pieces of laptops costs the manufacturer $240,000, the production unit cost will be $80 ($240,000/3,000 units). To break even and make profits, a single unit/laptop must be sold for a price that is higher than $80. Initially, the company will record these costs in the inventory assets accounts. Once the product is sold to retailers, it is recorded as COGS on the income statement.

Inventoriable Costs vs. Period Costs

The cost of business is divided into two categories, based on whether the expense is capitalized to the cost of the goods sold. The two categories are inventoriable costs and period costs.

Inventoriable costs are the costs incurred in the manufacturing or acquisition of a product. These costs are initially recorded in the balance sheet as current assets and do not appear in the income statement until the first unit is sold. Once the products are sold, they are charged to the expense account, and this allows businesses to match the revenue from a product with its cost of goods sold. Examples of product costs are direct materials, direct labor, and factory overheads.

On the other hand, period costs are associated with the passage of time and are not included in the inventoriable costs. If a business does not have production or inventory purchasing activities, the business will not incur inventoriable costs, but will still incur period costs. Period costs are associated with the selling activities of the business, and they are treated as actual expenses in the actual year when they occur. The US GAAP requires that all selling and administrative expenses be treated as period costs. Example of period costs includes marketing costs, office rent, and indirect labor.

Some of the advantages are as follows:

• Total Cost Control – Cost control is the key aim of all business persons. With the calculation, the business person will be able to understand what type of costs are incurred and how to control the same.
• Cost Comparison – They will help in identifying the total cost for the given period. This will help in comparing the cost of the given period with another period. Cost comparison gives a push to benchmarking and cost optimization.
• Bidding Price for Tenders – For the businessman, bidding the tender is the principal task for bringing new business. In this task, inventoriable cost calculation plays a pivot role as this will only help in determining the tender price.
• Operational Efficiency – It will help in verifying the optimum output received from the given input. Also, operational efficiency and effectiveness can be easily checked with the help of this cost.

The costs assignable to the ending inventory are determined-The cost of the ending inventory is subtracted from the cost of goods available for sale to determine the cost of goods sold-Cost of goods sold is then deducted from sales revenues in accordance with the matching principle.

All costs necessary to acquire the goods and place them in a condition ready for sale are included in inventoriable costs. Inventoriable costs include the invoice price plus freight-in less purchase discounts and purchase returns and allowances.

Inventoriable costs may be regarded as a pool of costs that consist of two elements:-Cost of the beginning inventory and-Cost of the goods purchased during the year•The sum of these elements equals the cost of goods available for sale.

Hence, product costs are:

• Manufacturing cost
• Purchase cost
• All cost that involved in making them to ready fo sale from raw materials.