In: Accounting
How do you distinguish between product and period costs?
Please describe the three major components of product costs: direct materials, direct labor, and manufacturing overhead.
Product cost | period cost |
The cost that can be apportioned to the product is known as Product Cost. | The cost that cannot be assigned to the product, but charged as an expense is known as Period cost. |
the main base of product cost is volume and this cost is included in inventory valuation | the base of period cost is time but this cost is not included in inventory valuation |
This cost is regarded as variable cost | This cost is taken as fixed cost |
It includes all manufacturing cost incurred by the company | It includes all non-manufacturing cost of the company |
Examples of product cost is cost of raw material, production overheads, depreciation on machinery, wages to labor, etc. | Examples of period cost is Salary, rent, audit fees, depreciation on office furniture, etc |
components of product cost:
1. Direct material- It is that cost of raw material which is used in the production of final output/product. For example, if a company produces leather bag. than for such company leather is the raw material. so the cost incured on the leather is direct material.
2.Direct labour- Labours that were involved in direct production of final products. They are not involved in administration, seling and distribution or any other services of the company
3. Manufacturing overheads- Manufacturing overhead is all of the costs that a factory incurs, other than the variable costs required to build products, such as direct materialsand direct labor. This overhead is applied to the units produced within a reporting period. for eg. depreciation of factory machine.