Business Sectors, Types of Inventory, Inventoriable Costs, and Period Costs
Learning Objective 5 Distinguish the financial accounting concepts of inventoriable costs and period costs
- costs are assets when incurred, then expensed as cost of goods sold when products are sold
- costs are expenses of the period in which they are incurred
Chapter 1 discussed how cost accounting serves both managerial and financial accountants. In the following two sections, we describe how cost accounting is used to achieve the objectives of financial accounting. In this section, we first describe the different sectors of the economy, the different types of inventory that companies hold, and the different classifications of manufacturing costs, and then discuss how these factors affect commonly used classifications of inventoriable and period costs.
Manufacturing-, Merchandising-, and Service-Sector Companies
We define three sectors of the economy and provide examples of companies in each sector.
- Manufacturing-sector companies purchase materials and components and convert them into various finished goods. Examples are automotive companies such as Toyota, cellular-phone producers such as Samsung, food-processing companies such as Heinz, and computer companies such as Lenovo.
- Merchandising-sector companies purchase and then sell tangible products without changing their basic form. This sector includes companies engaged in retailing (for example, electronics stores such as Best Buy and department stores such as Target), distribution (for example, a supplier of hospital products, such as Owens and Minor), or wholesaling (for example, BulbAmerica, which is a wholesale seller of lightbulbs).
- Service-sector companies provide services (intangible products) to their customers. Examples are law firms (e.g., Wachtell, Lipton, Rosen & Katz), accounting firms (e.g., Ernst & Young), banks (e.g., Barclays), mutual fund companies (e.g., Fidelity), insurance companies (e.g., Aetna), transportation companies (e.g., Singapore Airlines), advertising agencies (e.g., Saatchi & Saatchi), television stations (e.g., Turner Broadcasting), Internet service providers (e.g., Comcast), travel agencies (e.g., American Express), healthcare providers (e.g., CommonSpirit Health), and brokerage firms (e.g., Merrill Lynch).