What is Inventoriable Cost?
Inventoriable Cost is the total direct expense incurred by a manufacturing firm that includes a) cost related to the purchase of inventory (raw material, WIP, Finished Goods) and b) cost that is incurred to manufacture the goods till the point of sale.
Formula
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For eg:
Source: Inventoriable Cost (wallstreetmojo.com)
Examples of Inventoriable Cost
Let’s take some examples for better understanding.
Example #1
ABC limited is provided data related to manufacturing for the month of march’19.
- Raw Materials: $180,000
- Direct Wages: $90,000
- Machine Hours Worked (hour): $10,000
- Machine Hour Rate (per hour): $8
- Administration OH: $35,000
- Selling Overheads per Unit: $5
- Units Produced: 4000
- Units Sold: 3600
- Selling Price Per Unit: $125
Calculate the inventoriable cost and value of the closing stockValue Of The Closing StockClosing stock or inventory is the amount that a company still has on its hand at the end of a financial period. It may include products getting processed or are produced but not sold. Raw materials, work in progress, and final goods are all included on a broad level.read more from the above data.
Solution:
Step 1: Calculation
= 180000 + 90000 + 80000 = 350000
Step 2: Calculation showing the deriving value of the closing stock.
Total Value of Closing Stock = 400 * 87.5 = 35000
Thus, total inventoriable value of ABC limited for the month of March’19 is $ 3, 50,000.
Example #2
Below is the data related to the manufacturing of pencil in XYZ Corporation :
Calculate the following:
- Raw material consumed
- Prime cost
- Inventoriable cost
Solution:
Step 1: Calculation of Raw material consumed
Raw Material Consumed = 60000 + 480000 + (-50000) = 490000
Step 2: Calculation of Prime cost.
Prime Cost = 490000 + 240000 = 730000
Step 3: Calculation
= 730000 + 100000 + 12000 + (-15000) + 90000 + (-110000) = 807000
Advantages
Some of the advantages are as follows:
- Total Cost Control – Cost controlCost ControlCost control is a tool used by an organization in regulating and controlling the functioning of a manufacturing concern by limiting the costs within a planned level. It begins with preparing a budget, evaluating the actual performance, and implementing the necessary actions required to rectify any discrepancies.read more is the key aim of all business persons. With the calculation, the business person will be able to understand what type of costs are incurredCosts Are IncurredIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. read more and how to control the same.
- Cost Comparison – They will help in identifying the total cost for the given period. This will help in comparing the cost of the given period with another period. Cost comparison gives a push to benchmarking and cost optimization.
- Bidding Price for Tenders – For the businessman, bidding the tender is the principal task for bringing new business. In this task, inventoriable cost calculation plays a pivot role as this will only help in determining the tender price.
- Operational Efficiency – It will help in verifying the optimum output received from the given input. Also, operational efficiency and effectiveness can be easily checked with the help of this cost.
Difference between Inventoriable Cost and Period Cost
| Points | Inventoriable Cost | Period Cost |
|---|---|---|
| Year of recognition | It is incurred in this year and will be recognized in another year. | It is incurred and recognized in the same year. |
| Forming part of the inventory | It will form part of the cost of inventory. | This cost will not form part of the cost of inventory. |
| Income statement Vs. Balance sheet | They will be capitalized as inventory. As a result, the same will be disclosed in a balance sheet. | The period cost will never form part of a balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more. It will always be disclosed in the income statement. |
| Cost forms part of which entity. | Such costs can be found only in manufacturing entities. | Such costs can be found in all types of entities. |
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This has been a guide to what is inventoriable cost and its definition. Here we discuss the formula to calculate inventoriable cost with examples, components, and advantages. You can learn more from the following accounting articles –
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