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In: Accounting

How do you distinguish between product and period costs? Please describe the three major components of...

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.

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Expert Solution

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.


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