Question

1. Differentiate between product costs and period costs. Give concrete examples of product costs and period costs

2. What are the 3 classes of manufacturing costs? Give concrete examples for each.

3. Explain variable, fixed, and mixed costs and give concrete examples of each.

Answer 1

Product costs are those directly related to the production of a product or service intended for sale.Period costs are all other indirect costs that are incurred in production. Overhead and sales & marketing expenses are common examples ofperiod costs.

Examples of product costs are direct materials, direct labor, and allocated factory overhead. Examples of period costs are general and administrativeexpenses, such as rent, office depreciation, office supplies, and utilities.

Manufacturing costs fall into three broadcategories of expenses: materials, labor, and overhead.

Manufacturing costs are the costs incurred during the production of a product. These costs include the costs of direct material, direct labor, and manufacturing overhead. The costs are typically presented in the income statement as separate line items. An entity incurs these costs during the production process.

Direct material is the materials used in the construction of a product. Direct labor is that portion of the labor cost of the production process that is assigned to a unit of production. Manufacturing overhead costs are applied to units of production based on a variety of possible allocation systems, such as by direct labor hours or machine hours incurred. Examples of the types of costs that can be included in manufacturing overhead include:

• Salaries and wages for quality assurance, industrial engineering, materials handling, factory management, and equipment maintenance personnel

• Equipment repair parts and supplies

• Depreciation on factory assets

• Factory-related insurance and property taxes.

Examples of variable costs are sales commissions, direct labor costs, cost of raw materials used in production, and utility costs.

Fixed Costs Example. Fixed costs remain constant for a specific period. These costs are often time-related, such as the monthly salaries or the rent. For example, the rent of a building is afixed cost that a small business owner negotiates with the landlord based the square footage needed for its operations.

Costs that have both a fixed and variablecomponent. For example, the cost of operating an automobile includes some fixed costs that do not change with the number of miles driven (e.g., operating license, insurance, parking, some of the depreciation, etc.).