Period Cost vs Product Cost

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Period Cost vs Product Cost Differences

In a business cost is a major concern and it is associated largely with a production of revenue and it is often a crucial competent of a business if the business is looking to improve its margins in the longer term and to improve its market share in the market. There are different types of cost of business like variable cost, fixed cost, period cost or product cost.

In this article, we will try to understand the differences between Period Cost vs Product Cost

What is Period cost?

Period cost refers to the passage of time and is incurred by the business even if there is no production of goods or products or any purchase of inventory. The business still needs to incur that cost. A period cost is generally recorded in the books of accounts with the inventory assets.

What is Product Cost?

Product cost as the names suggest it is derived from the production of products and major types of products manufactured by the business. Product cost is only incurred in the business only when some product is acquired or manufactured. If there is no production of any goods or anything there will be no product cost incurred by the business it is directly related to the production of products and goods.

Period Cost vs Product Cost Infographics

Here we provide you with the top 6 difference between Period Cost vs Product Cost

Period Cost vs Product Cost – Key Differences

The key differences between Period Cost vs Product Cost are as follows –

Product cost are directly related to the production of products and are only incurred when the products are acquired or purchased. Period Cost, on the other hand, are incurred irrespective of the production of goods or services and are capitalized cost
Product cost is often also known as the direct cost which is directly responsible for the production of output so to match the accounting principle they are often referred to as the cost of goods sold and are shown above the gross profit of the business. Period cost are recurring in nature and are incurred month on month so they do not form the part of the cost of goods sold that is why they are shown as selling and administrative expenses and are shown below the gross profit of the business
Product cost in order to do more detail analysis is often broken into the fixed and variable cost to determine the cost incurred to produce the goods on the other hand period cost are often broken into rent, salaries, utilities etc. in order to provide more detailed cost structure to the investors
Example of the period cost is office rent, office depreciation (which is capitalized over the years of the asset) indirect labor which is not directly related to the production of goods. Examples of product cost are direct labor, inventory, raw material, manufacturing supplies etc

Period Cost vs Product Cost Head to Head Difference

Let’s now look at the head to head difference between Period Cost vs Product Cost

Period Cost		Product Cost
Period cost are not apportioned as they cannot be assigned to any products, but they are charged as an expense		The product cost is apportioned to the products as they are directly related to the production of goods and products
The basis of this cost is time		The basis of this cost is volume
The cost comprises of office and administrative, selling and distribution etc.		The cost comprises of manufacturing or production cost
A period cost is not a part of the cost of production		The product cost is often a part of the cost of production
A period cost is generally fixed as a cost like salaries rent are fixed in nature and are revised yearly		Product cost is generally variable in nature as it depends on the products of goods
Examples of Period Cost are audit fees, sales fees, rent of the office building etc.		Examples of Product Cost are Raw material, Direct labor, rent of the factory, inventory etc.

Conclusion

Separating these expense into various categories of the cost is often very important and at times are very helpful data to do a detailed analysis of the major cost drivers of the company. Cost analysis is critical to analyze the position of the business and how much revenue the business needs to generate in order to bring economies of scale in the business is often derived from the cost analysis of the company.

Business often segregates these cost on the basis of fixed, variable or direct or indirect which is often necessary of the business. Each business should ponder upon the various kinds of the cost it is incurring over the period of time which makes the business more self-reliant and helps in bringing cost savings in the company.