Inventoriable costs versus period costs

Each of the following cost items pertains to one of these companies: Star Market (a merchandising-sector company), Maytag (a manufacturing-sector company), and Yahoo! (a service-sector company):

a. Cost of lettuce and tomatoes on sale in Star Market's produce department
b. Electricity used to provide lighting for assembly-line workers at a Maytag refrigerator-assembly plant
c. Depreciation on Yahoo!'s computer equipment used to update its Website
d. Electricity used to provide lighting for Star Market's store aisles
e. Depreciation on Maytag's computer equipment used for quality testing of refrigerator components during the assembly process
f. Salaries of Star Market's marketing personnel planning local-newspaper advertising campaigns
g. Perrier mineral water purchased by Yahoo! for consumption by its software engineers
h. Salaries of Yahoo!'s marketing personnel selling advertising
i. Depreciation on vehicles used to transport Maytag refrigerators to retail stores

Required:
1. Distinguish between manufacturing-, merchandising-, and service-sector companies.
2. Distinguish between inventoriable costs and period costs.
3. Classify each of the cost items (a–h) as an inventoriable cost or a period cost. Explain your answers.

1. Manufacturing-sector companies purchase materials and components and convert them into different finished goods.
Merchandising-sector companies purchase and then sell tangible products without changing their basic form.
Service-sector companies provide services or intangible products to their customers—for example, legal advice or audits.
Only manufacturing and merchandising companies have inventories of goods for sale.

2. Inventoriable costs are all costs of a product that are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold. These costs for a manufacturing company are included in work-in-process and finished goods inventory (they are "inventoried") to build up the costs of creating these assets.
Period costs are all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the period in which they are incurred because they are presumed not to benefit future periods (or because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues.

3. (a) Lettuce and tomatoes purchased for resale by Star market—inventoriable cost of a merchandising company. It becomes part of cost of goods sold when the lettuce and tomatoes are sold.
(b) Electricity used for lighting at Maytag refrigerator assembly plant—inventoriable cost of a manufacturing company. It is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good.
(c) Depreciation on Yahoo!'s computer equipment used to update directories of websites—period cost of a service company. Yahoo! has no inventory of goods for sale and, hence, no inventoriable cost.
(d) Electricity used to provide lighting for Star Market's store aisles—period cost of a merchandising company. It is a cost that benefits the current period, and it is not traceable to goods purchased for resale.
(e) Depreciation on Maytag's assembly testing equipment—inventoriable cost of a manufacturing company. It is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good.
(f) Salaries of Star Market's marketing personnel—period cost of a merchandising company. It is a cost that is not traceable to goods purchased for resale. It is presumed not to benefit future periods (or at least not to have sufficiently reliable evidence to estimate such future benefits).
(g) Perrier mineral water consumed by Yahoo!'s software engineers—period cost of a service company. Yahoo! has no inventory of goods for sale and, hence, no inventoriable cost.
(h) Salaries of Yahoo!'s marketing personnel—period cost of a service company. Yahoo! has no inventory of goods for sale and, hence, no inventoriable cost.