Based on the association with the product, cost can be classified as product cost and period cost. Product Cost is the cost that is attributable to the product, i.e. the cost which is traceable to the product and is a part of inventory values. On the contrary, Period Cost is just opposite to product cost, as they are not related to production, they cannot be apportioned to the product, as it is charged to the period in which they arise.
Product cost comprises of direct materials, direct labour and direct overheads. Period costs are based on time and mainly includes selling and administration costs like salary, rent etc. These two type of costs are significant in cost accounting, that most people don’t understand easily. So, take a read of the article, that sheds light on the differences between product cost and period cost.
Content: Product Cost Vs Period Cost
|Basis for Comparison||Product Cost||Period Cost|
|Meaning||The cost that can be apportioned to the product is known as Product Cost.||The cost that cannot be assigned to the product, but charged as an expense is known as Period cost.|
|Which cost is regarded as Product / Period Cost?||Variable Cost||Fixed Cost|
|Are these costs included in inventory valuation?||Yes||No|
|Comprises of||Manufacturing or Production cost||Non-manufacturing cost, i.e. office & administration, selling & distribution, etc.|
|Part of Cost of Production||Yes||No|
|Examples||Cost of raw material, production overheads, depreciation on machinery, wages to labor, etc.||Salary, rent, audit fees, depreciation on office assets etc.|
Definition of Product Cost
The cost which is directly related to the buying and selling of the merchandise is known as Product Cost. These costs are associated with the procurement and conversion of raw material to finished goods ready for sale. Simply put, the cost which is a part of the cost of production is product cost. These costs can be apportioned to products. The cost is included in the valuation of inventory; that is why it is also known as Inventoriable costs. The following are the objective of computing product cost:
- It helps in the preparation of financial statement.
- It should be calculated for the purpose of product pricing.
Under different costing system, product cost is also different, as in absorption costing both fixed cost and variable cost are considered as Product Cost. On the other hand, in Marginal Costing only the variable cost is regarded as product cost. An example of such cost is the cost of material, labour, and overheads employed in manufacturing a table.
Definition of Period Cost
The cost which cannot be allocated to the product, but belongs to a particular period is known as Period Cost. These costs are charged against the sales revenue for the accounting period in which they take place. Period Cost is based on time, i.e. the period in which the expenses arise. These costs occur during a financial year, but they are not considered at the time of valuing the inventory because they are not associated with the purchase and sale of goods.
According to the Matching Principle, all expenses are matched with the revenue of a particular period. So, if the revenues are recognised for an accounting period, then the expenses are also taken into consideration irrespective of the actual movement of cash. By virtue of this concept, period costs are also recorded and reported as actual expenses for the financial year.
All the non-manufacturing costs like office and general expenses are considered as Period Cost like interest, salary, rent, advertisement, commission to the salesman, depreciation of office assets, audit fees, etc.
Key Differences Between Product Cost and Period Cost
The following are the major differences between product cost and period cost:
- Product Cost is the cost which can be directly assigned to the product. Period Cost is the cost which relates to a particular accounting period.
- Product Cost is based on volume because they remain same in the unit price, but differ in the total value. On the other hand, time is taken as a basis for period cost because as per the matching principle; the expenses should match the revenue and therefore, the costs are ascertained and charged in the accounting period in which they are incurred.
- In general, the variable cost is considered as product cost because they change with the change in the activity level. Conversely, the fixed cost is regarded as period costs because they remain unchanged irrespective of the activity level.
- Product Cost is included in the inventory valuation, which is just opposite in the case of Period Cost.
- Product cost comprises of all the manufacturing and production costs, but Period Cost considers all the non-manufacturing costs like marketing, selling, and distribution, etc.
In a nutshell, we can say that all the costs which are not product costs are period costs. The simple difference between the two is that Product Cost is a part of Cost of Production (COP) because it can be attributable to the products. On the other hand Period, the cost is not a part of the manufacturing process, and that is why the cost cannot be assigned to the products.