Product Costs vs Period Costs in Accounting
What are the differences between product costs and period costs in accounting?
Which costs are considered product costs and which costs are considered period costs?
Product Costs vs Period Costs in Accounting
Product costs and period costs are terms used in accounting to differentiate between costs associated with the production of goods or services and costs not directly related to production.
Product Costs:
Product costs are costs directly associated with the production of goods or services. They include direct materials, direct labor, and factory overhead. These costs are considered part of the cost of the inventory and are only expensed when the goods are sold. In this case, the product costs amount to $231,000 and consist of:
- Direct materials: $160,000
- Direct labor: $30,000
- Factory overhead: $41,000 (indirect labor + depreciation on factory equipment + oil consumed by sewing machines)
Period Costs:
Period costs are not directly associated with the production of goods or services. These costs are expensed during the period in which they are incurred. Examples of period costs include marketing costs, administrative costs, and selling costs. In this case, the period costs amount to $31,000 and include:
- Marketing costs: $5,000
- Depreciation of computers used in a sales department: $20,000
It is important for businesses to distinguish between product costs and period costs to accurately track and allocate expenses in their financial statements.