Product Period Costs

Costs which become part of the cost of the product rather than expenses of the period in which they are incurred are called as “Product costs”. They are included in inventory values. In financial statements such costs are treated as assets until the goods they are assigned to be sold. They become an expense at that time. These costs may be fixed as well as variable e.g. cost of raw-materials and direct wages, depreciation on plant and equipment etc.

Costs which are not associated with production are called “period costs”. They are treated as an expense of the period in which they are incurred. They may also be fixed as well as variable. Such costs include administrative costs, salesman salaries and commission, depreciation on office facilities etc. they are charged against the revenue of the relevant period. Difference of opinion exists regarding whether certain costs should consider as product costs or period costs. Some accountants are of the opinion that fixed manufacturing costs are more closely related to the passage of time than to the manufacturing of the product costs, while fixed manufacturing and other costs are period costs. However, their view does not seem to have been yet widely accepted.

The above explanation shows that the difference between the period and product costs by the accountants is made depending upon the purpose for which the information is required by the accountants as explained below:

While calculating the marginal cost of a product, all variable manufacturing costs of the product are treated as product costs. However, while computing the cost of a product under absorption costing, all manufacturing costs whether fixed or variable are treated as product costs. In case a firm is following direct cost method, only direct costs will be considered as product costs while indirect cost will be taken as period costs.

In financial accounting, all costs whether fixed or variable which become part of the inventory values are considered as product costs. While all costs which do not become part of the inventory values are treated as product costs. The product costs are treated as an expense in the period they are incurred.

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