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Concept explainers
Distinguish between product costs and period costs.
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Explain the difference between product cost and period cost.
Explanation of Solution
Product costs: The costs incurred to acquire the merchandise, ship the stock, prepare the merchandise for sale, and store the inventory are collectively referred to as product costs or inventory costs. Purchase price of merchandise, transportation costs, conversion costs, storage costs are some examples of product costs.
Period costs: These costs are not related to inventory; hence, they are not added to inventory costs. These costs are ascribed to the period in which they are incurred, hence, referred to as period costs. Selling expenses, administrative expenses, and incidental expenses like interest expense, and income tax expense are the examples of period costs.
The difference between product cost and period cost.
Product Cost | Period Cost |
The product cost is a cost that is related to the manufacturing of goods or merchandise until the sale of goods. |
Period cost is identified with the period of time in which they are incurred rather than with units of purchased or produced goods. Period costs are recognized as expenses during the time period in which they are incurred. |
Table (1)
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Managerial Accounting: Creating Value in a Dynamic Business Environment
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