Difference Between Period Cost vs Product Cost
Period cost vs Product cost is nothing but the expenses in the company, and anything management of a company wants a separate measurement cost because in any business cost is a major concern. The cost of any product is classified into Period cost and Product cost based on its relation with the products.
Classification of cost into Period and products is generally used for financial accounting purposes. Both terms are important in the development of an income statement. A proper determination of revenues and expenses must be based on a well-defined distinction between Period cost and Product cost.
Diagrammatic Representation of cost
Period Cost
Period cost is the expense as incurred; basically, the period cost is the all cost that is not product costs. The cost incurred on the headquarters parts of the operation such as all of the selling expenses, general and administrative costs this will be categorized as a period cost.
Period cost is not involved in the manufacturing of assets or transporting the assets to their final destination that’s why the period cost is also called a non-manufacturing cost. Period costs are reported on the income statement as expenses in the period in which they were incurred.
Period costs often known as operating expenses or selling, general and administrative expenses. Period cost is time-oriented and it is associated with the passage of time than with transactional events. Period cost is important for generating revenues but it does not directly link with units of products.
Product Cost
All of the expenses incurred in the factory or manufacturing unit for producing the assets are called as product cost or manufacturing costs.
There are three major categorize of product costs which are as follows:
- Direct Material cost.
- Direct Labour cost.
- Manufacturing Overhead cost.
Product costs are one of the most important costs managers need to know. Knowing the cost of a product is a necessity to make sure that its price correct or the company should increase or decrease production or even discontinue the product altogether.
Most companies use two different definitions of costs that are total product cost and Inventoriable product cost. The total cost is used by the company for internal decision-making. It includes all the costs of the value chain.
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Company management needs to know the total costs so it can price goods high enough to cover these costs and still make a normal profit. Inventoriable product costs, which are sometimes just called product costs, are only the costs incurred during the production stage of the value chain. Inventoriable product costs are required to be used for the cost of the assets, that is inventory, rather than total product costs.
Head to Head Comparison between Period Cost vs Product Cost (Infographics)
Below are the top 7 differences between Period Cost and Product Cost:
Key Differences Between Period Cost vs Product Cost
Let us discuss some of the major differences between Period Cost and Product Cost:
- Product cost is that cost that is directly or indirectly traceable with the product is called the product cost. Direct costs like direct material costs and direct labor costs and indirect costs like manufacturing overhead. Period cost is a cost that is not traceable with the product is called a period cost. It means that period cost has nothing to do with the product.
- Simply we can say that product cost is the cost that is considered for the valuation of inventory, however, the period cost should not be considered for valuation of inventory.
- If cost is due to resources related to manufacturing and production then it is considered as product costs, many countries’ product cost also known as inventoriable costs, if the cost is not part of the manufacturing process then it is considered as a period cost.
- Product cost is evaluated based on the volume because throughout the production product unit price will be the same only volume of it will change. However, the Period cost is based on time, expenditures identified more with a time period than with finished product costs.
- For financial reporting purposes, the product cost becomes a component of the cost of goods manufacturing and cost of goods sold and recorded in the balance sheet, however, for financial reporting purposes the period cost expenses to the income statement.
Period Cost vs Product Cost Comparison of Table
Let us discuss the topmost differences between Period Cost vs Product Cost:
| Difference | Period Cost | Product cost |
| Definition | Period cost is a time-oriented cost and is not connected with production is called Period cost. | The costs which are a part of the cost of the product rather than the expense of the period in which they are incurred are called product cost. |
| Contains | Period cost contains only non-manufacturing costs. | Product cost contains Manufacturing and production cost. |
| Financial Reporting | As period costs are not included in product costs, they are recorded as an expense on the income statement. | Product costs are recorded as inventory in the balance sheet and the cost of goods sold in the income statement. (After the sale of goods) |
| Cost Basis | Period cost is time-oriented costs. | Product cost is a volume-oriented cost. |
| Valuation | Period cost should not consider for the valuation of inventory. | In product cost Inventory valuation is included. |
| Also Known as | Period costs also called operating costs (excluding the cost of goods sold). | Product costs also called as inventoriable costs. |
| Example | Selling cost, General and Administrative cost, Marketing cost, interest expenses, Depreciation expenses, office rent, etc. | Direct material cost, direct labor cost, and Variable Manufacturing overhead cost, Fixed Manufacturing overhead cost. |
Conclusion
We can conclude from the above description that cost which is incurred due to the manufacturing unit is called as product cost and cost other than product cost is called as a period cost. Period cost is not in a straight line associated with the production of the end product because of this period cost is not assigned to the products, and recorded on the income statement for the period in which they incurred. Product cost methods help company management to price end product to cover the production cost and make a profit from it. Segregation of cost helps the company to analyze the data in detail which helps them to make the internal decision.
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