The cost of goods purchased for resale includes the purchase price as well as all other acquisition costs,[7]​ excluding any discounts.

Additional costs may include freight paid to acquire the goods, customs duties, non-recoverable sales or use taxes paid on materials used, and fees paid for acquisition. For financial reporting purposes, period costs such as purchasing department, warehouse, and other operating expenses are generally not treated as part of inventory or cost of goods sold. For income tax purposes in the United States, some of these period costs must be capitalized as part of inventory.[8]​ The costs of selling, packaging, and shipping products 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 related to idle capacity, be treated as expenses rather than as part of inventory.

The discounts that must be deducted from the costs of purchased inventory are as follows:.

Value added tax is generally not treated as part of the cost of goods sold if it can be used as an input credit or if it is recoverable from the tax authority.[10]​.

The cost of goods produced in the business must include all production costs.[11]​ Key components of cost generally include:.

Most companies make more than one of a particular item. Therefore, costs are incurred for multiple items rather than a particular item sold. Determining the amount of each of these components to allocate to particular goods requires tracking particular costs or making some cost allocations. Parts and raw materials are often tracked to particular sets (for example, batches or production runs) of goods, and then assigned to each item.

Labor costs include direct labor and indirect labor. These are wages paid to employees who spend all of their time working directly on the product being manufactured. Indirect labor costs are wages paid to other factory employees involved in production. The costs of payroll taxes and fringe benefits are generally included in labor costs, but can be treated as overhead costs. Labor costs can be assigned to an item or set of items based on timing records.

Material costs include direct raw materials as well as indirect materials and supplies. When non-incidental quantities of supplies are held, the taxpayer must maintain inventories of the supplies for income tax purposes, charging them at cost or cost of goods sold as used rather than as purchased.

Materials and labor can be allocated based on past experience or standard costs. When materials or labor costs for a period do not meet or exceed the expected amount of standard costs, a variance is recorded. These variances are then allocated between the cost of goods sold and the inventory remaining at the end of the period.

Determining overhead costs often involves making assumptions about what costs should be associated with production activities and what costs should be associated with other activities. Traditional cost accounting methods attempt to make these assumptions based on past experience and management's judgment regarding factual relationships. Activity-based costing attempts to allocate costs based on the factors that lead the company to incur the costs.

Overhead costs are often assigned to sets of goods produced based on the proportion of labor hours or costs or the proportion of materials used to produce the set of goods. Overhead costs may be called factory overhead") or factory load for costs incurred at the plant level or overhead for costs incurred at the organization level. Where labor hours are used, a load rate or overhead cost per labor hour may be added along with labor costs. Other methods may be used to associate overhead with particular goods produced. Overhead rates may be standard rates, in which case variations may exist, or they may be adjusted for each set of goods produced.

In some cases, the cost of goods sold can be identified with the item sold. Typically, however, the identity of the goods is lost between the time of purchase or manufacture and the time of sale.[12]​ To determine which goods have been sold and the cost of those goods, it is necessary to identify them or use a convention to assume which goods were sold. This may be referred to as a cost flow assumption or an inventory identification assumption or convention.[13]​ The following methods are available in many jurisdictions to associate costs with goods sold and goods still available:.

Jane owns a business that resells machines. As of early 2009, he has no machines or parts on hand. She buys machines A and B for 10 each, and then buys machines C and D for 12 each. All machines are the same, but they have serial numbers. Jane sells machines A and C for 20 each. Your cost of sales depends on your inventory method. Under specific identification, the cost of goods sold is 10 + 12, the particular costs of machines A and C. If she uses FIFO, her costs are 20 (10 + 10). If you use average cost, your costs are 22 ((10 + 10 + 12 + 12) / 4 x 2). If she uses LIFO, her costs are 24 (12 + 12). Therefore, your profit for accounting and tax purposes may be 20, 18, or 16, depending on your inventory method. After sales, your inventory values ​​are 20, 22, or 24.

After the end of the year, Jane decides that she can make more money by upgrading machines B and D. She purchases and uses 10 parts and supplies, and it takes 6 hours at 2 per hour to make the improvements on each machine. Jane has overhead expenses, including rent and electricity. You estimate that overhead adds 0.5 per hour to your costs. Therefore, Jane has spent 20 to upgrade each machine (10/2 + 12 + (6 x 0.5)). She sells machine D for 45. Her cost for that machine depends on her inventory method. If she used FIFO, the cost of machine D is 12 plus the 20 she spent on upgrading it, for a profit of 13. Remember, she used the two 10-cost items that are already under FIFO. If she uses average cost, it is 11 plus 20, for a profit of 14. If she used LIFO, the cost would be 10 plus 20 for a profit of 15.

In year 3, Jane sells the last machine for 38 and leaves the business. She recovers the last of her costs. Your total profits for all three years are the same for all inventory methods. Only the time of entry and the inventory balance differ. Here is a comparison under FIFO, Average Cost and LIFO:.

The value of assets held for sale by a company can decline due to a number of factors. Products may be defective or below normal quality standards (subnormal). Goods may become obsolete. The market value of goods may simply decrease due to economic factors.

When the market value of goods has decreased for any reason, the company may choose to value its inventory at the lower of cost or market value, also known as net realizable value.[15]​ This can be recorded by accruing an expense (i.e. creating an inventory reserve) for decreases due to obsolescence, etc. The net income for the current period, as well as the net inventory value at the end of the period, are reduced by the decrease in value.

Any property maintained by a business can lose value or be damaged by unusual events, such as a fire. The loss in value where the goods are destroyed is recorded as a loss and the inventory is fully depreciated. Generally, such a loss is recognized for both financial reporting and tax purposes. However, book and tax amounts may differ in some systems.

Several management theorists have proposed alternatives to traditional cost accounting. These include:

None of these opinions comply with U.S. Generally Accepted Accounting Principles or International Accounting Standards, nor are they accepted for most income or other tax reporting purposes.

The cost of goods purchased for resale includes the purchase price as well as all other acquisition costs,[7]​ excluding any discounts.

Additional costs may include freight paid to acquire the goods, customs duties, non-recoverable sales or use taxes paid on materials used, and fees paid for acquisition. For financial reporting purposes, period costs such as purchasing department, warehouse, and other operating expenses are generally not treated as part of inventory or cost of goods sold. For income tax purposes in the United States, some of these period costs must be capitalized as part of inventory.[8]​ The costs of selling, packaging, and shipping products 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 related to idle capacity, be treated as expenses rather than as part of inventory.

The discounts that must be deducted from the costs of purchased inventory are as follows:.

Value added tax is generally not treated as part of the cost of goods sold if it can be used as an input credit or if it is recoverable from the tax authority.[10]​.

The cost of goods produced in the business must include all production costs.[11]​ Key components of cost generally include:.

Most companies make more than one of a particular item. Therefore, costs are incurred for multiple items rather than a particular item sold. Determining the amount of each of these components to allocate to particular goods requires tracking particular costs or making some cost allocations. Parts and raw materials are often tracked to particular sets (for example, batches or production runs) of goods, and then assigned to each item.

Labor costs include direct labor and indirect labor. These are wages paid to employees who spend all of their time working directly on the product being manufactured. Indirect labor costs are wages paid to other factory employees involved in production. The costs of payroll taxes and fringe benefits are generally included in labor costs, but can be treated as overhead costs. Labor costs can be assigned to an item or set of items based on timing records.

Material costs include direct raw materials as well as indirect materials and supplies. When non-incidental quantities of supplies are held, the taxpayer must maintain inventories of the supplies for income tax purposes, charging them at cost or cost of goods sold as used rather than as purchased.

Materials and labor can be allocated based on past experience or standard costs. When materials or labor costs for a period do not meet or exceed the expected amount of standard costs, a variance is recorded. These variances are then allocated between the cost of goods sold and the inventory remaining at the end of the period.

Determining overhead costs often involves making assumptions about what costs should be associated with production activities and what costs should be associated with other activities. Traditional cost accounting methods attempt to make these assumptions based on past experience and management's judgment regarding factual relationships. Activity-based costing attempts to allocate costs based on the factors that lead the company to incur the costs.

Overhead costs are often assigned to sets of goods produced based on the proportion of labor hours or costs or the proportion of materials used to produce the set of goods. Overhead costs may be called factory overhead") or factory load for costs incurred at the plant level or overhead for costs incurred at the organization level. Where labor hours are used, a load rate or overhead cost per labor hour may be added along with labor costs. Other methods may be used to associate overhead with particular goods produced. Overhead rates may be standard rates, in which case variations may exist, or they may be adjusted for each set of goods produced.

In some cases, the cost of goods sold can be identified with the item sold. Typically, however, the identity of the goods is lost between the time of purchase or manufacture and the time of sale.[12]​ To determine which goods have been sold and the cost of those goods, it is necessary to identify them or use a convention to assume which goods were sold. This may be referred to as a cost flow assumption or an inventory identification assumption or convention.[13]​ The following methods are available in many jurisdictions to associate costs with goods sold and goods still available:.

Jane owns a business that resells machines. As of early 2009, he has no machines or parts on hand. She buys machines A and B for 10 each, and then buys machines C and D for 12 each. All machines are the same, but they have serial numbers. Jane sells machines A and C for 20 each. Your cost of sales depends on your inventory method. Under specific identification, the cost of goods sold is 10 + 12, the particular costs of machines A and C. If she uses FIFO, her costs are 20 (10 + 10). If you use average cost, your costs are 22 ((10 + 10 + 12 + 12) / 4 x 2). If she uses LIFO, her costs are 24 (12 + 12). Therefore, your profit for accounting and tax purposes may be 20, 18, or 16, depending on your inventory method. After sales, your inventory values ​​are 20, 22, or 24.

After the end of the year, Jane decides that she can make more money by upgrading machines B and D. She purchases and uses 10 parts and supplies, and it takes 6 hours at 2 per hour to make the improvements on each machine. Jane has overhead expenses, including rent and electricity. You estimate that overhead adds 0.5 per hour to your costs. Therefore, Jane has spent 20 to upgrade each machine (10/2 + 12 + (6 x 0.5)). She sells machine D for 45. Her cost for that machine depends on her inventory method. If she used FIFO, the cost of machine D is 12 plus the 20 she spent on upgrading it, for a profit of 13. Remember, she used the two 10-cost items that are already under FIFO. If she uses average cost, it is 11 plus 20, for a profit of 14. If she used LIFO, the cost would be 10 plus 20 for a profit of 15.

In year 3, Jane sells the last machine for 38 and leaves the business. She recovers the last of her costs. Your total profits for all three years are the same for all inventory methods. Only the time of entry and the inventory balance differ. Here is a comparison under FIFO, Average Cost and LIFO:.

The value of assets held for sale by a company can decline due to a number of factors. Products may be defective or below normal quality standards (subnormal). Goods may become obsolete. The market value of goods may simply decrease due to economic factors.

When the market value of goods has decreased for any reason, the company may choose to value its inventory at the lower of cost or market value, also known as net realizable value.[15]​ This can be recorded by accruing an expense (i.e. creating an inventory reserve) for decreases due to obsolescence, etc. The net income for the current period, as well as the net inventory value at the end of the period, are reduced by the decrease in value.

Any property maintained by a business can lose value or be damaged by unusual events, such as a fire. The loss in value where the goods are destroyed is recorded as a loss and the inventory is fully depreciated. Generally, such a loss is recognized for both financial reporting and tax purposes. However, book and tax amounts may differ in some systems.

Several management theorists have proposed alternatives to traditional cost accounting. These include:

None of these opinions comply with U.S. Generally Accepted Accounting Principles or International Accounting Standards, nor are they accepted for most income or other tax reporting purposes.