Financial Management Concepts in Layman's Language

Inventoriable Costs and Period Costs

By on September 5, 2012 in Costing Terms with 0 Comments

Inventoriable costs and period costs are also a type of classifications of costs. Inventoriable costs can be defined as costs which become part of inventories such as raw material, work in progress and finished goods inventory present in balance sheet of any business. On the other hand, period costs are all other costs that are not inventoriable costs. Period costs are those costs which are incurred and expensed in Profit and Loss Statement in the period they are incurred.

Inventoriable costs, in a manufacturing concern, are all direct material, direct labour, and manufacturing costs. These costs are incurred while the product is being manufactured but all of these are not expensed to profit and loss account in the same period. These costs become part of 3 types of inventories and sits in the balance sheet. When these inventories becomes finished goods and sold, Inventoriable costs transform into the cost of goods sold and thereby a part of profit / loss statement.

On the other hand, period costs, in a manufacturing concern, are all those costs which incurred and expensed to profit and loss account in the same period. For example, administration cost, finance cost, and selling and distribution costs are period costs. These expenses do not give benefits in the future periods or are very difficult to evidence their benefit. Therefore, these costs are expensed to P/L statement in the period they are incurred.

In manufacturing concerns, all the direct material, labour and manufacturing expenses are Inventoriable costs and other costs such as administration cost, finance cost, and selling and distribution cost are period costs.

In trading concerns, costs of acquisition of goods, which are sold in the same form, are considered inventoriable costs. These would include the purchase cost of goods, inward freight cost, handling, etc and all other costs which are necessary to bring goods in a position to be sold by the trader. Apart from these costs, all costs are period cost for trading concerns.

In a service concern, all the costs are considered period costs because there are no inventories in service sector.

Difference between Inventoriable Costs and Period Costs

Sr. No.

Inventoriable Costs

Period Costs

1

These costs may be incurred in one period and expensed in another year.

These costs are incurred and expensed in the same period.

2

These costs become part of any of the three inventories – raw material, work in progress and finished goods.

These costs do not form part of any inventories.

3

Becomes part of balance sheet in the form of inventories on assets side.

Do not become part of balance sheet in any form.

4

These costs exist in manufacturing and trading concerns.

These costs exist in manufacturing, trading, and service concerns.

To conclude, we can say that the inventoriable costs and period costs are differentiated because the matching concept of accounting. Conceptual understanding of accounts says that we should record all those expenses in the P/L statements in particular period which are related to the revenues of that particular period. Since, the benefit of inventoriable costs are available to future periods also, the part of inventoriable costs which benefits the future periods are taken to next period and are inventoried in balance sheet. On the other hand, the period costs normally tend to give benefit in the current period and no benefits of those expenses are normally available in the future period, these costs are matched to revenues of the same period. 

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