Question

What is the importance for a business to differentiate between product and period costs? List 3 examples of each and why it makes sense that they are a period or product cost.

Answer 1

Answer)

Product costs are only incurred if products are acquired or produced, and period costs are associated with the passage of time. Thus, a business that has no production or inventory purchasing activities will incur no product costs, but will still incur period costs.

Product costs are initially recorded within the inventory asset. Once the related goods are sold, these capitalized costs are charged to expense. This accounting is used to match the revenue from a product sale with the associated cost of goods sold, so that the entire effect of a sale transaction appears within one reporting period’s income statement.

Examples of product costs are direct materials, direct labor, and allocated factory overhead. Examples of period costs are general and administrative expenses, such as rent, office depreciation, office supplies, and utilities.

Product costs are sometimes broken out into the variable and fixed subcategories. This additional information is needed when calculating the break even sales level of a business. It is also useful for determining the minimum price at which a product can be sold while still generating a profit.