Period Costs vs. Product Costs: An Overview
Period costsand productcosts are two categories of costs for a company that are incurred in producing and selling their productor service.Below, we explain each and how they differ from one another.
Key Takeaways
- Product costs are those directly related to the production of a product or service intended for sale.
- Period costs are all other indirect costs that are incurred in production.
- Overhead and sales and marketing expenses are common examples of period costs.
Product Costs
Product costs are the direct costs involved in producing a product. A manufacturer, for example, wouldhave product costs that include:
- Direct labor
- Raw materials
- Manufacturing supplies
- Overhead that is directly tiedto the production facility such as electricity
For a retailer, the productcosts would include the supplies purchased from a supplier and any other costs involved in bringing their goods to market.In short, any costs incurred in the process of acquiring or manufacturing a product are considered product costs.
Productcosts are often treated as inventory and are referred to as"inventoriable costs" because these costs are used to value the inventory. When products are sold, the product costs become part of costs of goods sold as shown in the income statement.
Period Costs
Period costs are all costs not included in product costs. Period costs are not directly tied to the production process. Overhead or sales, general, and administrative (SG&A) costs are considered period costs. SG&A includescosts ofthe corporate office, selling, marketing, and the overall administration of company business.
Period costs are not assigned to one particular product or the cost of inventory like product costs. Therefore, period costs are listed as an expense in the accounting period in which they occurred.
Other examples of period costs include marketing expenses, rent (not directly tied to a productionfacility), office depreciation,and indirect labor. Also, interest expense on a company's debt would be classified as a period cost.
Considerations in Production Costs Calculations
Both product costs and period costs may be either fixed or variable in nature.
Production costs are usually part of the variable costs of business because the amount spent will vary in proportion to the amount produced. However, the costs of machinery and operational spaces are likely to be fixed proportions of this, and these may well appear under afixed costheading or be recorded as depreciation on a separate accounting sheet.
The person creating the production cost calculation, therefore, has to decide whether these costs are already accounted for or if they must be a part of the overall calculation of production costs.
Also, fixed and variable costs may be calculated differently at different phases in a business'slife cycleor accounting year. Whether the calculation is forforecasting or reporting affects the appropriate methodology as well.
For How Long Are Period Costs Recorded?
A period cost corresponds with a particular accounting period. If that reporting period is over a fiscal quarter, then the period cost would also be three months. If the accounting period were instead a year, the period cost would encompass 12 months.
Why Is Overhead a Period Cost?
Period costs do not directly relate to production. Overhead, or the costs to keep the lights on, so to speak, such as utility bills, insurance, and rent, are not directly related to production. However, these costs are still paid every period, and so are booked as period costs.
Is Labor a Period Cost or Product Cost?
The type of labor involved will determine whether it is accounted for as a period cost or a product cost. Direct labor that is tied to production can be considered a product cost. However, other labor, such as secretarial or janitorial staff, would instead be period costs.
FAQs
Key Takeaways. Product costs are those directly related to the production of a product or service intended for sale. Period costs are all other indirect costs that are incurred in production. Overhead and sales and marketing expenses are common examples of period costs.
What is the difference between period costs and product costs? ›
Expenses and rent fall under period costs, while product costs comprise the resources for production, such as labor and materials.
What is the difference between product cost and period cost quizlet? ›
Product costs are often called "inventoriable costs" or "manufacturing costs". period costs: -Selling and Administrative costs. These costs are reported on the income statement as they are incurred.
When comparing product versus period costs which of the below costs would be an example of a product cost? ›
Period Costs vs. Product Costs
| Product Costs | Period Costs |
|---|
| Examples: | Direct labor, direct materials, and manufacturing overhead | Marketing expense, selling, general and administrative expense, and CEO salary |
2 more rowsIt is important to separate period costs from product costs because income, expenses, and net income could be misstated if one capitalizes period costs to inventory instead of expensing them.
What is an example of a period cost? ›
Other examples of period costs include marketing expenses, rent (not directly tied to a production facility), office depreciation, and indirect labor. Also, interest expense on a company's debt would be classified as a period cost.
What are examples of product cost? ›
The costs involved in creating a product are called Product Costs. These costs include materials, labor, production supplies and factory overhead. The cost of the labor required to deliver a service to a customer is also considered a product cost.
What is the difference between cost and product? ›
Cost is typically the expense incurred for making a product or service that is sold by a company. Price is the amount a customer is willing to pay for a product or service. The cost of producing a product has a direct impact on both the price of the product and the profit earned from its sale.
What identify each cost as a period cost or a product cost? ›
if a product cost, classify it as direct materials, direct labor, or factory overhead. if a period cost, classify it as a selling expense or a general and administrative expense.
Is advertising a period or product cost? ›
Sales commissions, administrative costs, advertising and rent of office space are all period costs. These costs are not included as part of the cost of either purchased or manufactured goods, but are recorded as expenses on the income statement in the period they are incurred.
The distinction between product costs and period costs is important to: Properly measure a company's net income during the time specified on its income statement, and. To report the proper cost of inventory on the balance sheet.
Is salary a product or period cost? ›
Salaries: Salaries paid to non-production employees, such as administrative staff, managers, and other support personnel, are considered indirect labor expenses, which are a period cost.
Is rent a product or period cost? ›
The rent expense is considered as product cost when it is directly related or incurred to the manufacturing unit else it is considered as period cost.
Why are period costs important? ›
By understanding and effectively managing period costs, businesses can: Identify areas of cost inefficiency and take appropriate measures to optimize expenses. Evaluate the effectiveness of marketing and advertising strategies. Monitor and control general and administrative expenses.
Is it ethical to reclassify period costs as product costs? ›
These activities are usually expensive, so cutting back on them would mean potentially big savings for the company. Ordering the company's controller to reclassify as many as possible period costs to product costs - unethical.
Are factory utilities a product or period cost? ›
Period costs include non-manufacturing expenses like rent, utilities, advertising, administrative salaries, etc. They are expensed in the period incurred. Product costs include direct material, direct labor, and overhead involved in production.
Is freight in a product or period cost? ›
Freight would be considered a period cost if it is paid to ship the finished product to customers. This freight cost reflects a selling/distribution expense rather than a production expense. In summary, freight is a product cost if it is incurred as part of purchasing materials for manufacturing.
How do you calculate period costs? ›
There is no proper formula to calculate total period costs, and recording period expenses doesn't follow a set of rules across all areas. The accountant must carefully review the time-related costs and decide whether they should be included in an income statement.
