How to Distinguish Between Types of Inventory Cost and Period Cost Chron com

Product Costs Versus Period Costs

Explain the difference between normal cost of goods sold and adjusted cost of goods sold. Explain the difference between incremental cost and differential cost. M.B.A. Veteran Business and Economics teacher at a number of community colleges and in the for profit sector. Eric Sottile has a bacholors degree in accounting from the University of Kentucky and a bachelors degree in finance from the University of Kentucky. Eric works for a public accounting firm and has passed his CPA exams with an average score of 94. Direct labor is the human hours of physical or mental labor required to produce a product.

  • As a result, they aren’t assigned to any specific product but rather listed as a cost in the income statement.
  • Give an example in which product and period costs are the same and a separate example in which they are different.
  • Period costs are not directly tied to the production process.
  • Explain when should variances be allocated to work in process finished goods and cost of goods sold rather than just charge to the cost of goods sold at the end of the period.

In turn, steel becomes a direct material to an automobile manufacturer. E.g. TUW Company’s financial year end is 31st March Product Costs Versus Period Costs each year. In April 2017, it made a rent payment of $ 18,000 to the landlord’s account to cover rent from April-September.

How to Calculate Goods in Process Inventory

A period cost is a cost that is incurred on a periodic basis. This type of cost can include things such as rent, utilities, or insurance premiums. In most cases, these costs are fixed and do not change from month to month. As a result, they need to be taken into account when creating a budget or financial plan.

What is the difference between product cost and period cost quizlet?

Product costs are also called inventoriable costs. Period costs are all costs that are not product costs. Period costs are not included as part of the cost of either purchased or manufactured goods; instead, period costs are expensed on the income statement in the period in which they are incurred.

Fill in the blanks with the missing words, and replace the Xs with the correct amounts. Is the depreciation of ovens at a bakery classified as a product cost or a period cost? Are the paper towels used in factory restrooms classified as a product cost or a period cost? Are paper wrappers for bread at a bakery classified as a product cost or a period cost? Is the cost of labels attached to shirts made by a company classified as a product cost or a period cost?


Remember that retailers, wholesalers, manufacturers, and service organizations all have selling costs. As with direct material costs, direct labor costs of a product include only those labor costs distinctly traceable to, or readily identifiable with, the finished product. They are the costs that are directly and indirectly related to producing an item. In summary, product costs are not expensed until the item is sold when the product costs are recorded as cost of goods sold. Period costs are selling and administrative expenses, not related to creating a product, that are shown in the income statement along with cost of goods sold. In accounting, all costs incurred by a company can be categorized as either product costs or period costs.

Product Costs Versus Period Costs

Figure 6.8 “Absorption Costing Versus Variable Costing” summarizes the similarities and differences between absorption costing and variable costing. In a manufacturing company, overhead is generally called manufacturing overhead. Any of these companies may just use the term overhead rather than specifying it as manufacturing overhead, service overhead, or construction overhead. Some people confuse overhead with selling and administrative costs. Overhead is part of making the good or providing the service, whereas selling costs result from sales activity and administrative costs result from running the business.

Summary – Period Cost vs Product Cost

In short, any costs incurred in the process of acquiring or manufacturing a product are considered product costs. In sum, product costs are inventoried on the balance sheet before being expensed on the income statement. Period costs are those not related to the production of the product. Non-manufacturing costs are generally broken down into selling costs and general and administrative costs. Accurately calculating product costs also assists with more in-depth analysis, such as per-unit cost. Per-unit cost is calculated by dividing your costs by the number of units produced.

  • A proper determination of revenues and expenses must be based on a well-defined distinction between Period cost and Product cost.
  • Product costs are not expensed until the item is sold when the product costs are recorded as cost of goods sold.
  • Essentially, a period cost is any cost that is not a product cost.
  • It is an important metric, particularly when determining product pricing.
  • Is nurse salaries an example of a fixed cost or a variable cost?

Is nurse salaries an example of a fixed cost or a variable cost? Explain the cost-behavior patterns of variable and fixed costs. Explain the difference between mixed, variable, and fixed costs. One question that a business needs to have when it comes to profits or losses is to know why.

Period costs are the costs that your business incurs that are not directly related to production levels. These expenses have no relation to the inventory or production process but are incurred on a regular basis, regardless of the level of production. Classification of cost into Period and products is generally used for financial accounting purposes.

  • Instead, period costs will be referred to as period expenses since they will be reported on the income statement as selling, general and administrative (SG&A) or interest expenses.
  • Product Cost is based on volume because they remain same in the unit price, but differ in the total value.
  • Speaking of financial statements, it’s important that you take the time to review your financial statements on a regular basis.
  • Inventoriable product costs are required to be used for the cost of the assets, that is inventory, rather than total product costs.
  • Let’s see the top differences between period cost and product cost.

Also, interest expense on a company’s debt would be classified as a period cost. Thus, it is fair to say that product costs are the inventoriable manufacturing costs, and period costs are the nonmanufacturing costs that should be expensed within the period incurred. This distinction is important, as it paves the way for relating to the financial statements of a product producing company. And, the relationship between these costs can vary considerably based upon the product produced. Product cost comprises of direct materials, direct labour and direct overheads. Period costs are based on time and mainly includes selling and administration costs like salary, rent etc.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top