Product Cost vs Period Cost
Costs are classified into product costs and period costs on the basis of whether they are capitalized to the cost of products produced or not.
Costs that become part of the cost of goods manufactured are called product costs. Such costs are incurred on manufacturing process either directly as material and labor costs or indirectly as overheads. Since the matching principle of accounting requires expenses to be matched to the revenue they generate, therefore it is necessary to expense product costs only when the revenue from the sale of products is realized. This is achieved by debiting product costs to the cost of goods manufactured and thus expensed only at the time of sale of such goods.
Examples of products costs are raw material, labor, factory depreciation, fuel and packaging costs.
Product costs are further classified into direct material, direct labor and factory overhead.
Period costs are basically all costs other than product costs. These are not incurred on the manufacturing process and therefore these cannot be assigned to cost goods manufactured. Period costs are thus expensed in the period in which they are incurred.
Example of period costs are advertising, sales commissions, office supplies, office depreciation, legal and research and development costs.
Period costs may be further classified into selling costs and administrative costs.
Written by Irfanullah Jan