Question

Product costs are all the expenses related to producing or acquiring products. Period costs are all other expenses. Period costs are tracked during the period in which they occur and products costs are moved to the expense account for costs of goods sold so when the good they are associated with is sold to make matching those expenses with the sales revenue easy. For example the wages for sales staff who sell a books would be a period cost and be recorded as an expense for the period in which they work. Whereas, if you buy books one year, but don't sell them until the next they wouldn't be recorded in the expense account as cost of goods sold until the following year when they are actually sold and are a product cost.

The difference between a product cost and a period cost. A product cost are those costs that are directly associated with the production or acquisition of a good or product. For example, if a Mike's camera store owner bought cameras and paid the shipping to get them to the store the cost of the camera as well as the cost of the shipping would be considered product costs. A period cost is a little more abstract. A period cost would be all of the other expenses. For example the cost of marketing, advertising and administrative would be considered a period cost.

Respond to the above paragraphs in 2 separate paragraphs in your view or opinion.

Answer 1

Yes, product costs are incurred only if products are acquired or produced. It will form part of inventory and expensed when sold. It will also form part of Balance Sheet as product costs are not treated as an expense until the company sells its finished goods inventory. Until then such expenses are recorded as cost of goods sold. Examples of product costs are direct material, direct labour, manufacturing overhead etc. These costs exist in trading and manufacturing concerns only.

Period costs are associated with the passage of time ie., a business that has no production or inventory purchasing activities will incur no product costs, but will still incur period costs. It is incurred and expensed in the same period. It will not form part of any inventories and so not a balance sheet item. It is a fixed non- manufacturing cost which includes selling and distribution, office and administration expenses etc.These are costs which are deducted by the companies from the revenues ( for the period in which they are incurred) for the determination of operating income. These costs exist in trading, manufacturing and service concerns.