Recap of Inventoriable Costs and Period Costs

Exhibit 2-7 highlights the differences between inventoriable costs and period costs for a manufacturing company. The manufacturing costs of finished goods include direct materials; direct manufacturing labor; and manufacturing overhead costs such as supervision, production control, and machine maintenance. All of these costs are inventoriable: They are assigned to work-in-process inventory until the goods are completed, when they are moved to finished-goods inventory until the goods are sold. All nonmanufacturing costs, such as R&D, design, and distribution costs, are period costs.

Inventoriable costs and period costs flow through the income statement at a merchandising company similar to the way costs flow at a manufacturing company. At a merchandising company, however, the flow of costs is much simpler to understand and track. Exhibit 2-10 shows the inventoriable costs and period costs for a retailer or wholesaler that buys goods for resale. The only inventoriable cost is the cost of merchandise. (This corresponds to the cost of finished goods for a manufacturing company.) Purchased goods are held as merchandise inventory, the cost of which is shown as an asset in the balance sheet. As the goods are sold, their costs move to the income statement as the expense item cost of goods sold. A retailer or wholesaler also has a variety of marketing, distribution, and customer-service costs, which are period costs. Period costs are deducted from revenues in the income statement, without ever moving through an inventory asset account.