PRODUCT COST AND PERIOD COST- ALL YOU NEED TO KNOW

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.

Product Costs include any cost of acquiring or producing a product. If you manufacture a product, these costs would include direct materials and labor along with manufacturing overhead. Most of the components of a manufactured item will be raw materials that, when received, are recorded as inventory on the balance sheet.

Only when they are used to produce and sell goods are they moved to cost of goods sold, which is located on the income statement. When the raw materials are brought in they will sit on the balance sheet. When the product is manufactured and then sold a corresponding amount from the inventory account will be moved to the income statement. So if you sell a widget for RS.20 that had RS.10 worth of raw materials, you would record the sale as a credit (increasing) to sales and a debit (increasing) either cash or accounts receivable. The  RS.10 direct materials would be a debit to cost of goods sold (increasing) and a credit to inventory (decreasing).

The following are the objective of computing product cost:

• It helps in the preparation of financial statement.
• It should be calculated for the purpose of product pricing.

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 costs are costs that cannot be capitalized on a company’s balance sheet. In other words, they are expensed in the period incurred and appear on the income statement. Period costs are also called period expenses.

Period costs include any costs not related to the manufacture or acquisition of your product. Sales commissions, administrative costs, advertising and rent of office space are all period costs. These costs are not included as part of the cost of either purchased or manufactured goods, but are recorded as expenses on the income statement in the period they are incurred. Remember, when expenses incurred may not be when cash changes hands.

If advertising happens in June, you will receive an invoice, and record the expense in June, even if you have terms that allow you to actually pay the expense in July. Remember back to our insurance situation in the first paragraph. The cash may actually be spent on an item that will be incurred later, like insurance. It is important to understand through the accrual method of accounting, that expenses and income should be recognized when incurred, not necessarily when they are paid or cash received.

Comparison Chart

BASIS FOR COMPARISON	PRODUCT COST	PERIOD COST
Meaning	The cost that can be apportioned to the product is known as Product Cost.	The cost that cannot be assigned to the product, but charged as an expense is known as Period cost.
Comparison	Volume	Time
Which cost is regarded as Product / Period Cost?	Variable Cost	Fixed Cost
Are these costs included in inventory valuation?	Yes	No
Comprises of	Manufacturing or Production cost	Non-manufacturing cost, i.e. office & administration, selling & distribution, etc.
Part of Cost of Production	Yes	No
Examples	Cost of raw material, production overheads, depreciation on machinery, wages to labor, etc.	Salary, rent, audit fees, depreciation on office assets etc.