Inventoriable Cost

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

Inventoriable Cost = Total Direct Material + Total Direct Labor + Direct Overheads + Freight Inwards
Inventoriable Cost

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For eg:
Source: Inventoriable Cost (wallstreetmojo.com)

Examples of Inventoriable Cost

Let’s take some examples for better understanding.

You can download this Inventoriable Cost Excel Template here – Inventoriable Cost Excel Template

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

Example 1.1

= 180000 + 90000 + 80000 = 350000

Step 2: Calculation showing the deriving value of the closing stock.

Inventoriable Cost Example 1.2

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.

Note: Cost related to administration overhead and selling overhead are in nature of period cost, and hence the same is ignored during the calculation of inventoriable cost.

Example #2

Below is the data related to the manufacturing of pencil in XYZ Corporation :

Example 2

Calculate the following:

Solution:

Step 1: Calculation of Raw material consumed

Inventoriable Cost Example 2.1

Raw Material Consumed = 60000 + 480000 + (-50000) = 490000

Step 2: Calculation of Prime cost.

Prime Cost = Raw material Consumed + Direct Labor + Direct Expenses
Example 2.2

Prime Cost = 490000 + 240000 = 730000

Step 3: Calculation

Inventoriable Cost Example 2.3

= 730000 + 100000 + 12000 + (-15000) + 90000 + (-110000) = 807000

Advantages

Some of the advantages are as follows:

Difference between Inventoriable Cost and Period Cost

PointsInventoriable CostPeriod Cost
Year of recognitionIt 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 inventoryIt will form part of the cost of inventory.This cost will not form part of the cost of inventory.
Income statement Vs. Balance sheetThey 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.

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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