In a manufacturing organization, an important difference exists between product costs and period costs.

Product Costs

Product costs (also known as inventoriable costs) are costs assigned to products. These costs are identified as being either direct materials, direct labor, or factory overheads, and they are traceable or assignable to products. 

Product costs only become an expense when the products to which they are attached are sold. Product costs are also related to manufacturing activities.

Examples of product costs include the cost of raw materials used, depreciation on plant, expired insurance on plant, production supervisor salaries, manufacturing supplies used, and plant maintenance.

Types of Product Costs

Period Costs

Period costs are expired non-product costs. They are identified with measured time intervals and not with goods or services. Period costs can be defined as any cost or expense items listed in the firm’s income statement

Examples of period costs include selling costs and administrative costs. 

Both of these costs are considered period costs because selling and administrative expenses are used up over the same period in which they originate. In other words, period costs are related to the services consumed over the period in question.

Types of Period Costs

In a manufacturing organization, an important distinction exists between product costs and period costs.

Frequently Asked Questions

What are product costs?

Product costs are all the costs that are related to producing a good or service. They are either direct materials, direct labor or factory overhead. These items are directly traceable or assignable to the product being manufactured. Product costs only become an expense when they are sold and become period costss. Period costss are all the costs that are expired non product costs. They are all the expenses/costs listed in a firm's income statement.

What is the difference between product costs and period costs?

Period costs are expired non-product costs. They are identified with measured time intervals and not with goods or services. Period costs can be defined as any cost or expense items listed in the firm’s income statement. Examples of period costs include selling and administrative expenses. Both of these types of expenses are considered period costs because they are related to the services consumed over the period in question.

What is an example of a product cost?

An example of a product cost would be the cost of raw materials used in the manufacturing process. Product costs also include Depreciation on plant, expired insurance on plant, production supervisor salaries, manufacturing supplies used, and plant maintenance.

What is the benefit of classifying costs as products or periods?

The main benefit of classifying costs as either product or period is that it helps managers understand where their costs are being incurred and how those costs relate to the production process. This information can be used to make decisions about where to allocate resources and how to improve efficiency.

Why is period cost important?

It is important to keep track of your total period cost because that information helps you determine the net income of your business for each accounting period.

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