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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.
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- 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 cost 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.
Key Differences
The key differences are as follows –
- Product cost 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 cost.
- 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 sold 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 structure to the investors.
- An example of the period cost is office rent, office depreciation (capitalized over the years of the asset), and indirect labor (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 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 drivers. 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.
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