Financial Education

U.S. GAAP (ARB 43, SFAS 151) and International Accounting Standards (IAS 2) outline similar procedures for allocating costs to inventory.

Included costs:

• Cost of purchase
• Cost of conversion
• Other costs related to bringing the inventories to the present location and condition
• A portion of fixed production overhead, based on normal capacity levels

Excluded costs:

• Abnormal waste-related costs
• Labor and variable overhead costs
• Post-production storage costs
• Administrative and selling costs

The costs that are included in inventory are capitalized as balance sheet inventory until sold, thus matching the related expenses to the revenue generated. Any excluded costs are expensed as incurred.

For more information, see all articles on: Accounting

See also:

Accounting for Inventory After Purchase and Before Resale

Inventory Accounting: Differences Between U.S. GAAP and International Standards

How the Inventory Accounting Method Affects the Income Statement

Inventory Turnover and Days Inventory on Hand

Inventory Accounting Methods: LIFO, FIFO, Weighted Average and Specific Identification