The costs for a company to create and sell its product or service can be broken down into product costs and period costs. Below we discuss each one and how they differ from each other.
The direct costs associated with producing a product are called product costs. For example, a manufacturer's product costs include:
l work directly
l raw material
l manufacturing needs
l Expenses not directly related to the operation of industrial facilities, such as energy
A retailer's product cost includes supplies purchased from suppliers and any additional fees for bringing the retailer's product to market. Product cost is all expenses incurred in purchasing or manufacturing a good or product. Costs associated with derivatives are generally considered inventory. When an item is sold, the related cost becomes the product of the cost of goods sold and is reflected in the income statement.
All costs not included in the product cost are called period costs. The costs incurred during the period under review were not directly related to the manufacturing process. "Recurring Expenses" means overhead costs, commonly called selling, general, and administrative (SG&A) expenses. Costs associated with corporate headquarters and sales, marketing, and general operations management are included in SG&A. The cost of individual products or how inventory costs are related to period costs has nothing to do with production costs.
Therefore, period costs are recognized as expenses in the same accounting period in which they are incurred. Costs related to marketing, rent not directly related to manufacturing facilities, and office depreciation are other period expenses. Recurring costs also include interest that must be paid on the company's outstanding debt.
Product costs and period costs can be characterized as either constant or variable. Because the amount spent on production is directly proportional to the quantity of the good or service produced, production costs are often considered part of an organization's variable costs. Nonetheless, equipment and operating theater costs should be assessed proportionally against this total. These costs may appear under a fixed cost item or as depreciation in a separate journal.
Therefore, those responsible for preparing manufacturing cost calculations must evaluate whether these costs are accounted for or need to be included in the overall analysis of manufacturing costs. In addition, a company's fixed and variable costs may be estimated differently at different stages of the company's life cycle or in other fiscal years. Whether calculations are performed to make predictions or reports affects which method should be used.
"Product Cost" means all expenses related directly or indirectly to the final product of the item sold. Both direct and indirect costs must be considered, including direct labor and direct material costs, and indirect costs include manufacturing overhead. Period Expense refers to all expenses that cannot be directly linked to a specific product and explain that the total cost for the period does not affect the outcome.
In other words, the cost of a product is the cost considered in inventory valuation. On the other hand, inventory valuation should not consider period costs.
Costs are considered product costs due to the resources involved in manufacturing and production. In many countries, product costs are also referred to as inventory costs. On the other hand, if the cost has nothing to do with it