Distinguish between product costs and period costs as they relate to inventory.
By their nature, product costs "attach" to the inventory and are recorded in the inventory account. These costs are directly connected with the bringing of goods to the place of business of the buyer and converting such goods to a salable condition. Such charges would include freight charges on goods purchased, other direct costs of acquisition, and labour and other production costs incurred in processing the goods up to the time of sale.
Period costs are not considered to be directly related to the acquisition or production of goods and therefore are not considered to be a part of inventories.
Conceptually, these expenses are as much a cost of the product as the initial purchase price and related freight charges attached to the product. While selling expenses are generally considered as more directly related to the cost of goods sold than to the unsold inventory, in most cases, though, the costs, especially administrative expenses, are so unrelated or indirectly related to the immediate production process that any allocation is purely arbitrary.
Interest costs are considered a cost of financing and are generally expensed as incurred when related to getting inventories ready for sale.
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