Differences Between Period Costs and Product Costs

Differences Between Period Costs and Product Costs

Period costs are the costs that you are unable to capitalise into fixed assets, inventories or prepaid expenses. On the other hand, product costs are the costs that you have spent on manufacturing a product. You probably have heard of these terms, and you may wonder what their differences are, and you may mix them up. If so, you should seek help from an accounting firm in Johor Bahru and let the experts help you out.

Listed below are some differences between product costs and period costs that you should know.

Timing

You will only record a cost (Also see How Do Accountants Record Transactions?) as a product cost if you produce or acquire products, while the period cost is related to the passage of time. Hence, even though a company has not bought any inventories or produced any products, period costs will still be incurred, but not it will not incur product costs.

Ways of recording

Initially, you will record product costs as your inventory asset. As soon as you sell the goods related to that cost, you need to charge this capitalised costs to expense. By doing so, you will be able to match the revenue that you earned from the sale of a product with the cost of goods sold relevant to it (Also see Basic Accounting Concept – The Matching Principle). This enables the effect of a transaction from the sale to appear in the income statement in a particular reporting period. On the other hand, you will always need to charge the period cost to expense in the accounting period they incurred.

Subcategories

You can divide product costs into two subcategories, which are fixed costs and variable costs. You will need this extra information when you are calculating the level of breakeven sales (Also see An Overview of Breakeven Point) of your company and identify the lowest price that you can sell your products while still earning profits.

Conversely, you may divide period costs into those for administrative activities as well as those for selling activities. The purest form of period costs is the costs that a company has spent on its administrative activities. This is because the company needs to incur them regardless of the level of sales (Also see Can You Differentiate Net Income and Net Sales?) consistently. On the other hand, the sales level of the products may affect their selling costs, particularly when these expenses are mostly made up of sales commissions.

Examples

The costs for direct labour, direct materials as well as allocated factory overhead are some of the instances for product costs. On the contrary, utilities, rent, office supplies as well as general and administrative expenses are the examples for period costs.

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