What is the Difference Between Product Costs and Period Costs?

Product costs and period costs are two categories of costs in managerial accounting. Understanding the difference between these two types of costs is important for businesses to properly track their expenses and make informed decisions.

What is a Product Cost?

Product costs are costs associated with producing a product. These costs are directly related to the manufacturing or acquisition of a product and include direct materials, direct labor, and manufacturing overhead. Direct materials are the raw materials that are used to create the product, while direct labor is the cost of wages and benefits for employees directly involved in the production process. Manufacturing overhead includes all other costs associated with production, such as rent, utilities, and depreciation of equipment.

Product costs are also known as inventoriable costs because they are initially recorded as inventory on the balance sheet and are not expensed until the product is sold. When the product is sold, the cost of goods sold is recognized as an expense on the income statement.

What is a Period Cost?

Period costs, on the other hand, are costs that are not directly related to the production of a product but are instead incurred over a specific period of time. These costs are associated with the general operations of a business and include selling, general, and administrative expenses (SG&A). Examples of period costs include advertising, rent, salaries for non-production employees, and utilities for non-production areas.

Period costs are expensed on the income statement in the period in which they are incurred. These costs are not included in inventory and do not affect the cost of goods sold.

In summary, product costs are associated with the production of a product and are inventoried until the product is sold. Period costs are associated with the general operations of a business and are expensed in the period they are incurred. By understanding the difference between product costs and period costs, businesses can properly track and manage their expenses, helping them make informed decisions and maximize their profits.

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 13 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

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