Question

Accounting and Finance:

Using an example from your organisation, differentiate between “period costs” and “product costs” with example

Answer 1

ANSWER: DIFFERENTS BETWEEN PRODUCTION COST COST AND PERIOD COST

Consider a manufacturing organization .it needs inventory, machines and labors to operate their business. There will be some cost associated with manufacturing process in order to meet these requirements.

There are cost which are directly connected with production and there are some costs which are not related to production.

PRODUCTION COST

Cost associated with the purchase of the inventory and conversion of it as finished goods.

· Production cost is the cost which is directly connected to the production process. The cost which can be apportioned to a product is known as product cost for example direct material, The cost of producing a chair includes the cost of materials used such as wood, paint etc... It can be directly attributable to the product.

· Production cost varies according to the volume of production. For example the cost incurred to produce chair will vary according to number of chairs producing. The cost varies according to the volume of resources required for production.

· Production cost includes all cost incurred for the manufacturing of a product .for example the cost of producing a bag will be the total of direct material ,direct labor and all other cost associated with manufacturing and supply.

· Variable cost is considered as production cost because it vary according to the output produced. For example the cost for producing chair changes according to the number of the chair produced.

PERIOD COST

Period cost is the cost which is not related to manufacturing of a product .it is a cost which belongs to a particular period of time.

· Period cost is the cost relating to a specific period of time. For example salary of staffs, rent on building, and such cost is paid for a specific period of time. Such cost is not paid according to the volume of production. it is to be paid irrespective of the quantity produced.

· The period is taken as a basis for the period cost. The cost are calculated and   charged according to the year in which it incurred. For example rent paid on the building for the year .

· Fixed costs are considered as period cost because it does not change according to the production. For example rent paid on building remain fixed it does not vary according to the level of production.

· Period cost consist of non-manufacturing cost such as selling and distribution overhead ,office and administration over head and sales and marketing expenses.