Question

In your manufacturing company, how would you access and separate the product cost and period cost?
Show your explanation briefly with a suitable numerical example.

Answer 1

Product Costs and Period Costs are cost classification on the basis of cost attributability. Product costs are those costs which are directly attributable to the production or manufacturing of a product. While, period costs are not directly related to production of a product but are incurred over a period of time.

In a manufacturing company, a product cost can be Direct Material Cost, Indirect Material Cost, Labour Cost, Manufacturing overhead cost etc. While, period cost can be Office rent, Admin staff salary, depreciation on assets other than production machiney and factory building, etc. Product cost are included in inventory valuation where as period costs are not includible.

Numerical Example :

Suppose, a manufacturing company reports the following cost data for a product it manufactures :

Raw Materials : $ 50,000

Factory Labour Wages : $ 40,000

Factory Rent : $ 20,000

Electricity of factory : $ 5,000

Depreciation of Administrative building : $ 10,000

Salary of Corporate management team : $ 25,000

Interest on loan : $ 5,000

Statutory Audit Fees : $ 12,000

Here, Raw material, labour wages, factory rent and electricity of factory are product costs, totalling to $ 1,15,000. This will be added in inventory valuation.

And, Depreciation of Administrative building, Salary of Corporate management team, Interest on loan and Statutory Audit Fees are not related to product production and hence are period costs, amounting to $ 52,000. These are not included in inventory valuation and are expensed off directly in Income Statement.