What is the difference between period costs and product costs?

period costs

As an owner, you rely on their accuracy to make key management decisions. This can be particularly important for small business owners, who have less room for error. If product and four categories of income are are overstated or understated, or not recorded at all, your financial statements will be wrong as well. When preparing financial statements, companies need to classify costs as either product costs or period costs.

period costs

The manufacturing facility manager’s salary is not a period expense since it is considered a manufacturing overhead cost. On the other hand, the administrative assistant’s salary is a period cost since she works in the office and not on the production floor. Finally, both executives’ salaries are period costs since they also do not work on the production floor. The period costs could not be capitalized as they are not directly related to the production of the inventory and hence are charged in the profit and loss statement of the company.

How to Distinguish Between Types of Inventory Cost and Period Cost

This company has $3,400,000 in period costs for the fourth quarter from their selling, marketing, and administrative expenses. Their selling expense is from the commission they pay their salespeople. Their administrative costs are from executive salaries and professional costs.

  • In fact, this card is so good that our experts even use it personally.
  • Because product and period costs directly impact your financial statements, you need to properly categorize and record these costs in order to ensure accurate financial statements.
  • Examples of period costs include sales costs and administrative costs.
  • Period costs are expenses that will be reported on the income statement without ever attaching to products.

There’s no period cost formula because the included accounts differ from business to business. However, we’ll cover the most common period costs and how to calculate them. While both cost types are important, we’ll focus on period costs here. Business owners who do their small business bookkeeping need to know period cost accounting in order to write off their business expenses correctly.

How to Identify a Period Cost

The  $10 direct materials would be a debit to cost of goods sold (increasing) and a credit to inventory (decreasing). As shown in the income statement above, salaries and benefits, rent and overhead, depreciation and amortization, and interest are all period costs that are expensed in the period incurred. On the other hand, costs of goods sold related to product costs are expensed on the income statement when the inventory is sold.

Product costs also include Depreciation on plant, expired insurance on plant, production supervisor salaries, manufacturing supplies used, and plant maintenance. Operating expenses are expenses related to daily operations, whereas period expenses are those costs that have been paid during the current accounting period but will benefit future periods. To illustrate, assume a company pays its sales manager a fixed salary. Firms account for some labor costs (for example, wages of materials handlers, custodial workers, and supervisors) as indirect labor because the expense of tracing these costs to products would be too great. Indirect labor consists of the cost of labor that cannot, or will not for practical reasons, be traced to the products being manufactured. Period costs are costs that cannot be capitalized on a company’s balance sheet.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. Product costs only become an expense when the products to which they are attached are sold.

Looking at these expenses the utilities for the manufacturing facility and the production worker’s wages are both product costs because these are manufacturing overhead costs and direct labor costs. Utilities for the retail shop as well as the cashier’s wages are period costs. In general, overhead refers to all costs of making the product or providing the service except those classified as direct materials or direct labor.

What are the 2 types of period costs?

  • Current expense: Current expenses are costs a company obtains relating to the current period.
  • Historical expense: Historical expenses are costs already incurred in the previous period, which the company doesn't consider in decision-making.






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