Inventoriable Cost (Definition, Formula)

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

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.

Calculate the inventoriable cost and value of the closing stock from the above data.

Solution:

Step 1: Calculation

= 180000 + 90000 + 80000 = 350000

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

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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 :

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 = Raw material Consumed + Direct Labor + Direct Expenses

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 control is the key aim of all business persons. With the calculation, the business person will be able to understand what type of costs are incurred 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 sheet, it will be always disclosed in the income statement.
Cost forms part of which entity	Such cost can be found only in manufacturing entities.	Such cost can be found in all type of entities.