Product Cost vs Period Cost

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

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.

Key Takeaways

  1. 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. 
  2. 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.
  3. While product cost consists of manufacturing and production costs, period cost includes administrative, office, and selling and distribution expenditures.
  4. 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.

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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.read more 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.

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Key Differences

The key differences are as follows –

product-cost-vs-peroid-cost

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Period vs. Product Cost Comparative Table

Period CostProduct Cost
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.

Conclusion

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.read more. 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)

Is the rental required a product cost?

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.

What are the types of product cost?

The cost of a product generally includes three types of costs: direct material costs, direct labor costs, and manufacturing overhead costs.

Why is it important to distinguish between product costs and period 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.

How do product costs and period costs affect financial statements?

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.

Recommended Articles

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 –

Reader Interactions

Comments

  1. CS says

    Hi, shoudn’t the titles in the infographic chart be reversed…?
    It states Product Costs on the left, but the text used refers to Period costs…?

    • Dheeraj Vaidya says

      Yes, many thanks for pointing this out. Will get this error rectified asap.

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