Cogito

Determining Inventory Cost: Product vs Period

Posted in CFA by qmarks on April 2, 2010

Cost is the basis for inventory valuation. However not all costs are involved in determining the cost of inventories.

The costs known as product costs are capitalized in the Inventories account on balance sheet include

  • purchase cost
  • conversion cost
  • allocation of fixed production overhead based on normal capacity levels
  • other costs necessary to bring the inventory to its present location and condition

By capitalizing inventory cost as an asset, expense recognition is delayed until the inventory is sold

Not all inventory costs are capitalized: some are recognized as expense in the period incurred. These are the period costs:

  • unallocated portion of fixed production overhead
  • abnormal waste of materials, labor, overhead
  • storage costs (unless required as part of the production process)
  • administrative overhead
  • selling costs
Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: