Costing and Cost of Goods Sold

Besides fixed assets, managing inventory is one of the greatest concerns for supply chain and operations professionals. At the end of a reporting period, a company must determine how much inventory 

Inventory is classified differently for retail companies, merchants, and manufacturers. Retailers classify their inventory as merchandise inventory, the merchant owns it and it is ready for sale. Contrastingly, manufacturers and assembly plants categorize their inventory as raw materials, work-in-process, and finished goods. Manufacturers and assemblers classify inventory this way to indicate the condition of the inventory and if it is ready for sale. For example, prior to assembly of an aircraft, an aircraft manufacturer would classify components of the airplane such as tires, wiring, and hydraulic pumps as raw materials. These materials are directly used in production. As soon as assembly starts, the manufacturer would then classify the components as work-in-process. Work-in-process is inventory costs related to direct materials, direct labor, and manufacturing overhead. A completed aircraft ready for sale would be classified as finished goods. As a reminder, all inventories are combined and reported on the balance sheet. 

Inventory is typically valued at cost and reported on the balance sheet in this way. If the market value of the inventory is less than the actual cost of the inventory, then companies may reduce the inventory amount to the lower of cost or market value. Inventory costs include the amount to acquire the product plus the costs related to placing it in the location and condition ready for sale. This includes costs related to purchasing, transporting, and storing inventory. Purchasing costs decline by the amount of purchase returns, allowances, and discounts received. Further, manufacturers and assemblers add direct costs of production, such as labor and overhead, to the COGS. 

It is important to note that manufacturing overhead consists of all manufacturing costs other than direct materials and direct labor that is related to production and included in the COGS. Overhead includes factory supplies used and labor not directly identified with the production of specific products. It also includes general manufacturing costs such as depreciation, maintenance, repairs, property taxes, insurance, and utilities. Additionally, a reasonable share of the 

Companies use inventory account balances to determine COGS on the income statement. 

---

Variable production costs and cost of goods sold in country n in period t ... 

---