Question

for purposes of preparing financial statements, we often classify costs as either period cosrs or product costs. What is the difference between them? Support answers with examples.

Answer 1

The product costs can be defined as those costs which are necessary in the process of the manufacturing of products such as direct labor, direct materials, and allocated factory overhead; and on other hands the period costs can be defined as those costs that cannot be capitalized into fixed assets, inventory, or prepaid expenses, thus are not necessary in the process of the manufacturing of products such as rent, utilities, office depreciation, and office supplies.

Period costs will be expensed in the period wherein it occur and product cost will be expensed in the period wherein the associated product units will be sold. Thus the product costs would be considered to be inventory's part and will be charged against revenues as cost of sales only when these are sold. Hence the costs which become part of the cost of goods manufactured will be termed as product costs. On contrary the period costs would be charged immediately against revenue.