Difference Between Product Cost and Period Cost
The key difference between product cost and period cost is that product concurs when a company produces any products. Therefore, such costs are apportioned to a product. On the other hand, period costs incur with time. Consequently, they are not apportioned to any product but charged as an expense in the income statement.
In business, the cost is a significant concern, and it is mainly associated with the production of revenue. It is often crucial to a company’s competence to improve its margins and market share in the long run. Different business costs are variable, fixed, period, or product costs.
Table of contents
- The basic difference between product cost and the period cost is the fact that product costs are incurred whenever a company creates any products is a major distinction between product costs and period costs. As a result, a product is allocated these costs.
- Period charges rise over time. As a result, they aren’t assigned to any specific product but rather listed as a cost in the income statement.
- While product cost consists of manufacturing and production costs, period cost includes administrative, office, and selling and distribution expenditures.
- Office rent, depreciation (capitalized over the asset’s useful life), and indirect labor are examples of period costs (which are not directly related to the production of goods). Product costs include direct labor, inventory, raw materials, manufacturing supplies, and other charges.
What is Product Cost?
As the name suggests, product costs are derived from producing major types of products by the business. Product cost is only incurred when some product is acquired or produced. If there is no production of any goods, the business will incur no product cost.
What does Period Cost Mean?
Period cost refers to the passage of time incurred by the businesses even if there is no production of goods or inventory purchase. Therefore, a period costPeriod CostPeriod cost refers to all those costs which are not related or tied with the production process of the company i.e., they are not assigned with any of the particular product of the company and are thus shown in the financial statement of the company for the accounting period in which they are incurred. is generally recorded in the books of accounts with inventory assets.
Period Cost vs. Product Cost Infographics
Let’s see the top differences between period cost and product cost.
The key differences are as follows –
- Product costProduct CostProduct cost refers to all those costs which are incurred by the company in order to create the product of the company or deliver the services to the customers and the same is shown in the financial statement of the company for the period in which they become the part of the cost of the goods that are sold by the company. are directly related to producing goods and services and are only incurred when the products are acquired or purchased. On the other hand, period costs 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 a direct cost responsible for production. 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 business’s gross profit. Period costs recur monthly and thus are not a part of the cost of goods sold. Due to this, they are recorded as underselling and administrative expenses below the business’s gross profit.
- For a more systematic analysis, product cost is often broken into fixed and variable costs to determine the cost incurred to produce the goods. On the other hand, period costs 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.
- An 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 (capitalized over the years of the asset), and 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 costsExamples Of Product CostsProduct cost refers to all those costs which are incurred by the company in order to create the product of the company or deliver the services to the customers and the same is shown in the financial statement of the company for the period in which they become the part of the cost of the goods that are sold by the company. are direct labor, inventory, raw material, manufacturing supplies, etc.
Period vs. Product Cost Comparative Table
|Period costs are not apportioned as they cannot be assigned to any products but are charged as an expense.
|The product cost is apportioned to the products as they are directly related to the production of goods and services.
|The basis of this cost is time.
|The basis of this cost is volume.
|The cost comprises office and administrative costs, selling and distribution cost, etc.
|The cost comprises manufacturing or production cost.
|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 like salaries, rent and is revised yearly.
|Product cost is generally variable as it depends on the production 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, factory rent, inventory, etc.
Separating the costs into various categories is often very important and, at times, useful to analyze the company’s 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.. In addition, cost analysis is critical to examine the position of the business and the amount of revenue it needs to generate to achieve economies of scale.
Business often segregates these costs based on fixed, variable, direct, or indirect. Each company should ponder upon the various expenses they incur over the period, making the business more self-reliant and cost-efficient.
Frequently Asked Questions (FAQs)
If a manufacturer leases its manufacturing plant and equipment, the lease is a product cost (as opposed to a period cost). That is, rent is included in the manufacturing overhead assigned to the goods produced.
The cost of a product generally includes three types of costs: direct material costs, direct labor costs, and manufacturing overhead costs.
The distinction between product cost and the period cost is important for the following purpose- Accurately measuring a company’s net income during the period reported on the income statement and displaying the correct storage costs on the balance sheet.
Period costs are always recognized in profit or loss in the period in which they are incurred. In summary, product costs are recognized in the balance sheet before being expensed in the income statement. Therefore, period costs are only recognized as expenses in the income statement.
This article is a guide to the Period Cost vs. Product Cost. Here we discuss the top differences between them and infographics and a comparison table. You may also have a look at the following articles –