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