Difference Between Product Cost and Period Cost
The key difference between product cost and period cost is that product cost is the cost which the company incurs only in case it produces any products and those costs are apportioned to a product whereas, period costs are the costs which are incurred by the company with the passage of time and they are not apportioned to any product rather charged as an expense in income statement.
In business, the cost is a significant concern, and it is mainly associated with a production of revenue. It is often a crucial competence 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.
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 produced.
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.
What does Period Cost Mean?
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 inventory purchase. The business still needs to incur that cost. A period cost is generally recorded in the books of accounts with the inventory assets.
Period Cost vs. Product Cost Infographics
Let’s see the top differences between period vs. product cost.
The key differences 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 costs, on the other hand, are incurred irrespective of the production of goods or services and are capitalized costCapitalized CostCapitalization cost is an expense to acquire an asset that the company will use for their business; such costs are recorded in the company's balance sheet at the year-end. These costs are not deducted from the revenue but are depreciated or amortized over time..
- 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 commonly referred to as the cost of goods soldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. and are shown above the gross profit of the business. Period costs 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 businessGross Profit Of The BusinessGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services..
- Product cost to do more detailed 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 split into rent, salaries, utilities, etc. to provide a more detailed cost structureCost StructureCost Structure refers to those costs or expenses (fixed as well as variable costs) which businesses will incur or will have to incur to produce the desired objective of the business; such costs include the cost of purchasing the raw material to the cost of packaging the finished products. to the investors.
- Example of the period costExample Of The Period CostSelling expenses, advertisement expenses, administrative expenses, rent, commissions are some of the period cost expenses. Such expenses cannot be capitalized into assets and occur over a duration of time. is office rent, office depreciation (which is capitalized over the years of the asset) indirect laborIndirect LaborEmployees who are not directly involved in the production of finished goods or services are classified as indirect labour. They do, however, contribute to the production and manufacturing ecosystem. Accountants, human resources, sales and marketing teams, are it's examples., which is not directly related to the production of goods. Examples of product costs are direct labor, inventory, raw material, manufacturing supplies, etc.
Period vs. Product Cost Comparative Table
|Period Cost||Product Cost|
|Period costs 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 a volume.|
|The cost comprises 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 is fixed in nature and is revised yearly.||Product cost is generally variable as it depends on the products of goods.|
|Examples of period costs 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.|
Separating these expenses into various categories of the cost is often very important and, at times, is useful data to do a detailed analysis of the significant cost driversCost DriversA cost driver is a unit that derives the expenses and sets a basis on which a particular cost is to be allocated between the different departments and on the basis of that driver’s activity completed in that particular period the cost is allocated. These are the structural determinants of the activities on which cost is being incurred and determine the behavior of the costs on an activity. of the company. Cost analysis is critical to analyze the position of the business and how much revenue the business needs to generate to bring economies of scale in the business is often derived from the cost analysis of the company.
Business often segregates these costs based on fixed, variable, or direct or indirect, which is often necessary for the business. Each business should ponder upon the various kinds of the cost it is incurring over the period, which makes the business more self-reliant and helps in bringing cost savings in the company.
This article has been a guide to the Period Cost vs Product Cost. Here we discuss the top differences between them along with infographics and comparison table. You may also have a look at the following articles –