Question

Can managers reclassify some costs to switch from product costs to period costs (and vice versa) to show higher or lower inventorable costs?

Answer 1

Yes, it is possible. Example: Warehousing cost of finished goods inventory should actually be treated as a period cost, as it is incurred after production is completed and not before, and therefore should not be treated as product or inventoriable cost.

But, if the management chooses to treat such warehousing cost as product cost, then a part of such cost can be deferred to the next accounting period through unsold finished goods inventory, as a result of which the cost of goods sold for the current accounting period decreases with a commensurate increase in net income.

Similarly research and development costs can also be capitalized instead of being treated as period costs.