Costs of goods made by the businesses include material, labor, and allocated overhead.
[4] These costs are treated as an expense in the period the business recognizes income from sale of the goods.
Such modification costs include labor, supplies or additional material, supervision, quality control, and use of equipment.
Cost of goods sold may be the same or different for accounting and tax purposes, depending on the rules of the particular jurisdiction.
For U.S. income tax purposes, some of these period costs must be capitalized as part of inventory.
[9] Costs of selling, packing, and shipping goods to customers are treated as operating expenses related to the sale.
Both International and U.S. accounting standards require that certain abnormal costs, such as those associated with idle capacity, must be treated as expenses rather than part of inventory.
Discounts that must be deducted from the costs of purchased inventory are the following: Value added tax is generally not treated as part of cost of goods sold if it may be used as an input credit or is otherwise recoverable from the taxing authority.
[11] The key components of cost generally include: Most businesses make more than one of a particular item.
Parts and raw materials are often tracked to particular sets (e.g., batches or production runs) of goods, then allocated to each item.
Indirect labor costs are the wages paid to other factory employees involved in production.
Materials and labor may be allocated based on past experience, or standard costs.
Such variances are then allocated among cost of goods sold and remaining inventory at the end of the period.
Traditional cost accounting methods attempt to make these assumptions based on past experience and management judgment as to factual relationships.
Overhead costs are often allocated to sets of produced goods based on the ratio of labor hours or costs or the ratio of materials used for producing the set of goods.
After year end, Jane decides she can make more money by improving machines B and D. She buys and uses 10 of parts and supplies, and it takes 6 hours at 2 per hour to make the improvements to each machine.
Here is a comparison under FIFO, Average Cost, and LIFO: The value of goods held for sale by a business may decline due to a number of factors.
The market value of the goods may simply decline due to economic factors.
[15] This may be recorded by accruing an expense (i.e., creating an inventory reserve) for declines due to obsolescence, etc.
Any property held by a business may decline in value or be damaged by unusual events, such as a fire.