Understanding Product Costs and Period Costs

Understanding Product Costs and Period Costs

What type of cost would you include when calculating the expenses that your company has spent? The costs that you should consider are the product costs as well as period costs. The former is the cost that you have spent on producing a product. In contrast, the latter refers to any costs that you are unable to capitalise into fixed assets, inventories or prepaid expenses (Also see Differences Between Period Costs and Product Costs). Accounting tasks which are associated with costs can be very confusing, especially if you are unfamiliar with accounting. So, to prevent your books of accounts from becoming a mess, you should seek help from an accounting firm in Johor Bahru.

Here are what product costs and period costs mean:

Product Costs

A company’s product costs include its direct materials, direct labour, factory overhead, as well as consumable production supplies. Also, business owners may consider the labour cost it requires to provide services to their clients as the company’s product cost. This means that they should take employee benefits and compensation, payroll taxes (Also see Introduction to Payroll Accounting), as well as all other costs which are relevant to service into account.

To calculate the product cost per unit, you need to work out the costs of products which you produced in the same batch by summing up the total costs incurred in all direct materials, direct labour, factory overhead, as well as consumable production supplies. Then, divide the total amount by the total number of units produced to yield the product cost by the unit.

You may document the product costs as your inventory assets if you have not sold the products, Once you have sold the product, you need to charge them to the cost of goods sold, and it will be an expense on your income statement.

You will see product costs on your financial statements (Also see Why Do We Need to Generate Financial Statements?) as they include the manufacturing overhead and this complies with the requirement of IFRS. Nevertheless, business owners may change the product costs by removing overhead from it when they want to make short-term decisions for sale price and production.

Period Costs

Some people would call period cost as a period expense as they always need to charge it to the expense. Compared to business events which are associated with transactions, period costs are more closely related to the passage of time.  Business owners should charge the period costs in the accounting period they incurred. However, in the company’s income statement, instead of including them in the cost of goods sold, they should include them in the selling and administrative expenses.

A lot of expenses fall under the category of period costs, which include depreciation expense, office rent, advertising expenses, selling expenses, general and administrative expenses, and so on. Most of them are the administrative costs of the company. Business owners should note that they should not consider costs which are included in fixed assets, inventories or prepaid expenses (Also see Accounting for Prepayments) as period costs.

As you can see from the examples above, costs that you may entirely consume in the current period may be period costs. On the contrary, if the use of the costs is spread over a few accounting periods or they are related to a product, then they may not be period costs.

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