Question

What are product and period costs and how do they impact financial statements?

Answer 1

Product Cost- It refers to the cost which is incurred in the process of converting raw materials into finished goods. In other words, it can be recognised as the expenses which are incurred in manufacturing process. These expenses are directly apportioned to the product cost. The costs are generally variable in nature as it depends upon the number of goods produced. These costs are helpful to find out the "gross profit" of the company by adjusting against the incomes .Hence these costs are transferred to "Trading a/c " . Eg- Direct material ,labour , rent of the factory, etc.

Period cost - It refers to the cost which is incurred during a specified period, generally known as accounting period. These costs are incurred whether there is a production of goods or not. These costs are not apportioned to the cost of a product rather they are adjusted in income statement (i.e. Profit & loss a/c). Hence these are helpful in providing "Net Profit" of the company. These costs comprises of office & administration and selling & distribution departments costs. Eg- audit fees, salesman fee, rent of office building, etc.