what is a product cost versus a period
cost less discuss the accounting
concepts product cost and period cost
with some easy to understand examples we
will do a high-level cost accounting for
a hypothetical company called toy
giraffe Inc as the name suggests this is
a company producing and selling toy
giraffes we are going to classify
various types of cost as either product
costs on the left or period cost on the
right product costs include all the
costs that are involved in acquiring or
making product proper costs are viewed
as attaching to units of product as the
goods are purchased or manufactured
period costs are expensed on the income
statement in the period in which they
are incurred first type of cost
marketing expense to determine whether
this is product cost or period cost we
ask ourselves whether we can stick these
cost to the DRF marketing expense is a
clear example of period cost period
costs are not a necessary part of the
manufacturing process as a result period
costs cannot be assigned to the products
or to the cost of inventory how about
depreciation the answer here is it
depends the company has two areas it
depreciates manufacturing depreciation
for the factory machines at homes and
depreciation on the office and it's
equipment depreciation expense for
factory machines is in product cost
depreciation for the office is in period
cost factory labor this is clearly a
product cost stick it to the giraffe you
need people in the factory to make the
product utilities electricity natural
gas water just like with depreciation it
depends if we know how much electricity
was used in the factory versus in the
office we can split the total utilities
bill we allocate what was used in the
factory to product costs and we allocate
what was used in the office two period
costs raw material used in production
this is clearly a product cost you need
raw material in order to assemble the
product and
turn it into finished goods research and
development expenses for the
next-generation toys this is a period
cost it doesn't stick to the product we
could go on and on with other types of
cost but I think you are getting the
idea now after classifying the cost as
either product cost or period cost we
can take the next step in our cost
accounting let's deal with the product
cost first we produce 100,000 units in
q1 at a total manufacturing cost of
$500,000 of these 100,000 units 50,000
are sold in q1 with cost of goods sold
of $250,000 cost of goods sold in short
cogs refers to the product costs of
those goods a business has sold during a
particular period the other 50,000 units
go to inventory for future sales at cost
$250,000 inventory is an asset on the
balance sheet this is my period costs
are sometimes called inventoriable cost
they remain attached as the goods go
into inventory awaiting sale now that we
have parked half of the product cost on
the balance sheet let's review the
income statement on the left are the toy
giraffes that have been sold this is the
product costs of those units that have
been sold 50% of the total for each
category in q1 this is called cost of
goods sold on the right are selling
general and administrative expenses as
DNA and research in development we take
our sticky notes from earlier on and
place them in the appropriate area or in
a more formal look on the income
statement cost of goods sold is right
here near the top if you take revenue
and deduct Cox you get to gross margin
sgna and arnie are placed as a line item
a bit lower in the income statement if
you take gross margin and deduct SGA and
RD you get to operating margin I hope
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