Question

At what point on the flow do the inventoriable cost turns into period costs?

Answer 1

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.