Product Costs vs Period Costs

In financial accounting, costs usually appear as account balances on the balance sheet or as expenses in the income statement. Companies classify these costs based on accounting conventions and standards. However, the same does not apply to managerial accounting. In that branch, companies may divide costs based on other factors. One such classification occurs between period and product costs.

Period and product costs are different in various ways. Before discussing the differences between these costs, it is crucial to study both individually.

Add your business to our business directory https://harbourfronts.com/directory/ Add your business. Also check out other businesses in the directory

What are Product Costs?

Products costs refer to costs the companies incur on acquiring or producing a product. These costs are relevant for companies that sell goods. Usually, product costs include raw material and conversion costs. Conversion costs, in turn, include direct labour and factory overheads. Usually, companies capitalize product costs as a part of the inventory or stock balances.

Product costs are crucial in managerial accounting to establish the cost of producing a single product unit. These become a part of the finished goods on the balance sheet. Once the company sells the underlying products, it can transfer those costs to the income statement for that period. Product costs are variable and fluctuate as the activity levels within a company increase or decrease.

What are Period Costs?

Period costs include all costs incurred during a specific time. These are items not related to the production or acquisition process directly. Therefore, period costs consist of all items not included as product costs. These costs do not become a part of the capitalized cost of a specific product. Instead, companies expense out period costs each period through the income statement.

Period costs include several overheads that do not contribute to the production process. These may be rent, selling costs, depreciation, interest, etc. Unlike product costs, these costs do not go to the balance sheet. Period costs are still crucial to running a company. However, these costs generally relate to the administrative side of the business.

Product Costs vs Period Costs: What are the differences?

The differences between product and period costs can be summarized in the following areas.

Apportionment

Companies apportion product costs to every unit of the product acquired or produced. This process selects only those costs directly related to that unit. On the other hand, period costs do not get apportioned or assigned to any unit of product. Instead, companies charged them to the income statement as an expense.

Nature

Product costs increase as the activity levels within a company grow. On the other hand, period costs do not relate to how many units a company produces. Instead, these costs fluctuate with time.

Items

Product costs usually include material costs, labour costs, and factory overheads. On the other hand, period costs include administrative, selling, offices, and similar expenses.

Impact on financial statements

As mentioned above, product costs become a part of the balance sheet through finished goods. When companies sell those goods, these costs go to the income statement. On the other hand, period costs do not impact the balance sheet. These become an expense on the income statement for each period.

Conclusion

Companies incur costs during their business. They may need to classify these costs for several reasons. Usually, companies seek to differentiate between product and period costs. Product costs include any items directly related to acquiring or manufacturing products. Period costs are an expense for a specific period.

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSFrench strikers maintain pressure to reject pension plan
French strikers maintain pressure to reject pension plan

PARIS (AP) — French train and metro drivers, refinery workers, garbage collectors and others were holding further strikes on Wednesday against President Emmanuel Macron’s plan to raise the retirement age to 64, in efforts to keep up pressure on the government amid the ongoing parliamentary…

Stay up-to-date with the latest news - click here
LATEST NEWSDollar hits 3-mth high as Powell flags higher rates
Dollar hits 3-mth high as Powell flags higher rates

LONDON — The dollar scaled multi-month highs against most other major currencies on Wednesday, after Federal Reserve Chair Jerome Powell warned that U.S. interest rates might need to go up even faster and higher than expected to rein in stubborn inflation. Higher rates benefit the…

Stay up-to-date with the latest news - click here
LATEST NEWSGold near one-week low as Fed’s Powell strikes hawkish tone
Gold near one-week low as Fed’s Powell strikes hawkish tone

Gold prices hovered near a one-week low on Wednesday after Federal Reserve Chair Jerome Powell said that U.S. interest rates might need to go higher than expected to control sticky inflation. Spot gold was flat at $1,813.79 per ounce by 0907 GMT, after hitting its…

Stay up-to-date with the latest news - click here
LATEST NEWSChina accuses Washington of trying to block its development
China accuses Washington of trying to block its development

BEIJING (AP) — Is the United States out to sabotage China? Chinese leaders think so. President Xi Jinping accused Washington this week of trying to isolate his country and hold back its development. That reflects the ruling Communist Party’s growing frustration that its pursuit of…

Stay up-to-date with the latest news - click here
LATEST NEWSStocks slump, dollar flies on hawkish Powell
Stocks slump, dollar flies on hawkish Powell

LONDON — Stocks fell, the dollar hit multi-month highs and U.S. and German short-term bond yields were parked at their highest levels since at least 2008 as Federal Reserve chair Jerome Powell put big rate hikes back on the table to tame inflation. Ahead of…

Stay up-to-date with the latest news - click here

Leave a Reply