Product Cost vs. Period Cost: Know the Difference
By Shumaila Saeed || Published on January 27, 2024
Product Cost refers to the costs directly tied to the production of goods, while Period Cost relates to all other expenses incurred in a specific time period.
Key Differences
Product Cost encompasses all the direct costs associated with the manufacture of a product, including direct materials, direct labor, and manufacturing overhead. Period Cost, on the other hand, refers to all the costs that are not directly tied to the production process and are incurred over a time period, like rent, administrative expenses, and sales commissions.
Shumaila Saeed
Jan 27, 2024
While Product Cost is capitalized as inventory on the balance sheet and becomes part of the cost of goods sold when the product is sold, Period Cost is not capitalized. Instead, Period Costs are expensed in the income statement in the period in which they are incurred, reflecting their nature as operational expenses not tied to production.
Shumaila Saeed
Jan 27, 2024
Product Costs are variable, fluctuating based on the level of production output. The more products a company manufactures, the higher its product costs. In contrast, Period Costs tend to be more fixed and are incurred regardless of the level of production or sales activity, such as monthly salaries for administrative staff or rental costs.
Shumaila Saeed
Jan 27, 2024
In accounting, Product Costs are essential for calculating the cost of goods sold and gross profit. They directly impact the profitability related to the production of goods. Period Costs, however, are more associated with the company's overall operational efficiency and are crucial for determining the net income.
Shumaila Saeed
Jan 27, 2024
Product Costs are closely linked to manufacturing and production operations, making them a key focus in manufacturing and production industries. Period Costs are more prevalent in the financial analysis of companies with significant administrative and sales activities, where these costs can form a substantial portion of total expenses.
Shumaila Saeed
Jan 27, 2024
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Comparison Chart
Nature of Costs
Directly tied to production of goods
Not directly tied to production
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Jan 27, 2024
Capitalization
Capitalized as inventory, part of COGS when sold
Expensed in the period incurred
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Jan 27, 2024
Variability
Variable with production volume
Mostly fixed, regardless of production volume
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Jan 27, 2024
Accounting Impact
Affects cost of goods sold and gross profit
Affects operational efficiency and net income
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Jan 27, 2024
Industry Relevance
More relevant in manufacturing industries
More relevant in service and administrative roles
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Jan 27, 2024
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Product Cost and Period Cost Definitions
Product Cost
Costs assignable to goods produced
The product cost of the baked goods was determined by ingredients and baking labor.
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Jan 06, 2024
Period Cost
Expenses not directly tied to production activities
The company's period cost included office rent and utilities.
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Jan 06, 2024
Product Cost
Manufacturing expenses that form part of inventory value
The company's inventory valuation included product costs like material and direct labor expenses.
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Jan 06, 2024
Period Cost
Non-manufacturing costs like administrative and selling expenses
The period cost for the quarter included sales commissions and executive travel.
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Jan 06, 2024
Product Cost
Expenses directly linked to the production volume
As production scaled up, the product cost per unit decreased due to economies of scale.
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Jan 06, 2024
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Period Cost
Fixed costs not varying with production volume
Even during low production periods, the period cost like insurance remained constant.
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Jan 06, 2024
Product Cost
Direct costs incurred in producing goods
The product cost of the smartphone included the cost of components and assembly labor.
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Jan 06, 2024
Period Cost
Operating costs incurred over a specific time frame
Monthly administrative salaries were part of the period cost.
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Jan 06, 2024
Product Cost
Sum of direct materials, labor, and overhead
Calculating the product cost of the furniture involved raw materials, carpentry labor, and factory overhead.
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Jan 06, 2024
Period Cost
Costs expensed in the income statement when incurred
Advertising expenses were recorded as a period cost in the quarter they were incurred.
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Jan 06, 2024
Repeatedly Asked Queries
Do Product Costs affect inventory value?
Yes, Product Costs are capitalized and add to inventory value.
Shumaila Saeed
Jan 27, 2024
What are examples of Period Costs?
Examples of Period Costs are rent, administrative salaries, and marketing expenses.
Shumaila Saeed
Jan 27, 2024
Do Product Costs appear on the income statement?
Product Costs appear as part of COGS when goods are sold.
Shumaila Saeed
Jan 27, 2024
What is Product Cost?
Product Cost refers to the direct costs involved in producing goods.
Shumaila Saeed
Jan 27, 2024
Are Period Costs fixed?
Period Costs are often fixed but can include variable components.
Shumaila Saeed
Jan 27, 2024
How are Period Costs treated in accounting?
Period Costs are expensed in the period they are incurred.
Shumaila Saeed
Jan 27, 2024
What is Period Cost?
Period Cost includes all costs not directly associated with production.
Shumaila Saeed
Jan 27, 2024
Are Product Costs variable?
Yes, Product Costs vary with the level of production.
Shumaila Saeed
Jan 27, 2024
Can Product Costs change over time?
Product Costs can change based on efficiency and production volume.
Shumaila Saeed
Jan 27, 2024
How does production level affect Product Costs?
Higher production levels can lead to lower per-unit Product Costs.
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Jan 27, 2024
What's included in Product Costs?
Product Costs include direct materials, labor, and manufacturing overhead.
Shumaila Saeed
Jan 27, 2024
Where do Period Costs appear in financial statements?
Period Costs are listed as expenses on the income statement.
Shumaila Saeed
Jan 27, 2024
Do Period Costs depend on production volume?
Period Costs generally do not depend on production volume.
Shumaila Saeed
Jan 27, 2024
Do Period Costs impact gross profit?
No, Period Costs do not directly impact gross profit.
Shumaila Saeed
Jan 27, 2024
How are Product Costs calculated?
Product Costs are calculated by summing direct materials, labor, and overhead.
Shumaila Saeed
Jan 27, 2024
Why are Product Costs important for pricing?
Product Costs help determine the minimum price to cover production expenses.
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Jan 27, 2024
Is depreciation a Product Cost or Period Cost?
Depreciation of production equipment is a Product Cost; other depreciation is a Period Cost.
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Jan 27, 2024
Can Period Costs be variable?
Some Period Costs, like commissions, can be variable.
Shumaila Saeed
Jan 27, 2024
Do all companies have Period Costs?
Yes, all companies incur Period Costs like administrative expenses.
Shumaila Saeed
Jan 27, 2024
How do service companies treat Period Costs?
Service companies often have higher Period Costs due to less emphasis on production.
Shumaila Saeed
Jan 27, 2024
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About Author
Written by
Shumaila SaeedShumaila Saeed, an expert content creator with 6 years of experience, specializes in distilling complex topics into easily digestible comparisons, shining a light on the nuances that both inform and educate readers with clarity and accuracy.
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