Cost Accounting (14th Edition)

ILLUSTRATING THE FLOW OF INVENTORIABLE COSTS AND PERIOD COSTS 39
Illustrating the Flow of Inventoriable Costs and
Period Costs
We illustrate the flow of inventoriable costs and period costs through the income statement
of a manufacturing company, for which the distinction between inventoriable costs
and period costs is most detailed.
Manufacturing-Sector Example
Follow the flow of costs for Cellular Products in Exhibit 2-7 and Exhibit 2-8. Exhibit 2-7
visually highlights the differences in the flow of inventoriable and period costs for a
manufacturing-sector company. Note how, as described in the previous section, inventoriable
costs go through the balance sheet accounts of work-in-process inventory and finished
goods inventory before entering cost of goods sold in the income statement. Period costs are
expensed directly in the income statement. Exhibit 2-8 takes the visual presentation in
Exhibit 2-7 and shows how inventoriable costs and period expenses would appear in the
income statement and schedule of cost of goods manufactured of a manufacturing company.
We start by tracking the flow of direct materials shown on the left of Exhibit 2-7 and
in Panel B of Exhibit 2-8.
Step 1: Cost of direct materials used in 2011. Note how the arrows in Exhibit 2-7 for
beginning inventory, $11,000 (all numbers in thousands), and direct material purchases,
$73,000, “fill up” the direct material inventory box and how direct material used,
$76,000 “empties out” direct material inventory leaving an ending inventory of direct
materials of $8,000 that becomes the beginning inventory for the next year.
The cost of direct materials used is calculated in Exhibit 2-8, Panel B (light blue
shaded area) as follows:
Beginning inventory of direct materials, January 1, 2011 $11,000
+ Purchases of direct materials in 2011 73,000
– Ending inventory of direct materials, December 31, 2011 ƒƒ8,000
= Direct materials used in 2011 $76,000
Inventoriable
Costs
Exhibit 2-7
Direct
Material
Purchases
$73,000
Direct
Manufacturing
Labor, $9,000
Manufacturing
Overhead costs
$20,000
Flow of Revenue and Costs for a Manufacturing-Sector Company, Cellular Products
(in thousands)
BALANCE SHEET
INCOME STATEMENT
Beg. inv., $11,000
Direct
Material
Inventory
End. inv., $8,000
STEP 2:
Total
Manufacturing
Costs Incurred
in 2011
$105,000
STEP 1:
Direct
Material
Used
$76,000
Beg. inv., $6,000
Work-in-
Process
Inventory
End. inv., $7,000
STEP 3:
Cost of
Goods
Manufactured
$104,000
Beg. inv., $22,000
Finished
Goods
Inventory
End. inv., $18,000
when
sales
occur
Revenues
$210,000
deduct
STEP 4:
Cost of
Goods Sold
(an expense)
$108,000
Equals Gross Margin
$102,000
deduct
R & D Costs
Design Costs
Marketing Costs
Distribution Costs
Customer-Service Costs
Period
Costs
$70,000
Equals Operating Income
$32,000