Inventoriable costs are all costs of a product that are considered assets in a company’s balance sheet when the costs are incurred and that are expensed as cost of goods sold only when the product is sold. For manufacturing-sector companies, all manufacturing costs are inventoriable costs. The costs first accumulate as work-in-process inventory assets (in other words, they are “inventoried”) and then as finished goods inventory assets. Consider Cellular Products, a manufacturer of cellular phones. The cost of the company’s direct materials, such as computer chips, direct manufacturing labor costs, and manufacturing overhead costs create new assets. They are first transformed into work-in-process inventory and eventually become finished-goods inventory (the cellular phones). When the cellular phones are sold, the costs move from being an asset to an expense, i.e., cost of goods sold. This cost is matched against revenues, which are inflows of assets (usually cash or accounts receivable) received for products or services customers purchase.
Note that the cost of goods sold includes all manufacturing costs (direct materials, direct manufacturing labor, and manufacturing overhead costs) incurred to produce them. The cellular phones may be sold during a different accounting period than the period in which they were manufactured. Thus, inventorying manufacturing costs in the balance sheet during the accounting period when the phones are manufactured and expensing the manufacturing costs in a later income statement when the phones are sold matches revenues and expenses.
For merchandising-sector companies such as Walmart, inventoriable costs are the costs of goods purchased that are resold in their same form. These costs are made up of the costs of the goods themselves plus any incoming freight, insurance, and handling costs for those goods. Service-sector companies provide only services or intangible products. The absence of inventories of tangible products for sale means service-sector companies have no inventoriable costs.