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Inventoriable cost is a term used to describe all expenses related to the establishment of the current inventory on hand. Sometimes referred to as cost of inventory on hand, the inventoriable cost will include not only the cost of purchasing the items that are found in the inventory, but also all expenses that are related to using those items in the creation of products that are ultimately offered for sale. Other costs, such as transportation and even storage of the inventory, are also considered to be inventoriable.
For a manufacturing operation, determining the cost of inventory on hand will begin with the actual unit cost of every item that is maintained within an inventory. For raw materials, this means the purchase price assessed by the seller and ultimately paid by the buyer, the expenses incurred to transport the purchased materials from the seller to the buyer, and even any costs that have to do with maintaining those raw materials until they are introduced into the production process and used in the creation of various products.
In like manner, a finished goods inventory will also have an inventoriable cost. This will include not only all the costs related to the raw materials, but also the direct labor and any fixed or variable overhead that is incurred while producing those finished goods. If those goods are stored at a rented facility, even the cost of the rental will be accounted for as an inventoriable cost. Indirect costs such as utilities consumed in maintaining a proper temperature for the goods in inventory will be taken into consideration.
Even resellers will incur some sort of inventoriable cost in order to maintain an inventory of goods that can be sold directly to customers. For example, if the business sells home cleaning supplies, the owner may choose to maintain a limited inventory of the more popular items at his or her place of business rather than relying strictly on direct order fulfillment from the supplier. When this is the case, the owner will have a cost of inventory on hand that is based on the purchase price for each unit kept on hand, plus the cost of shipping that applies to each of those units, and the costs of maintaining a storage facility for those items. In order to offset the cost of inventory on hand, the owner will set the retail price for each of those units at a level that covers all relevant expenses and allows for a reasonable profit to be realized on each unit sold from the inventory.
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