Home > Managerial Accounting > Cost Classifications > Product and Period Cost Product Cost vs Period Cost Costs are classified into product costs and period costs on the basis of whether they are capitalized to the cost of products produced or not.
Total period costs are recorded during the same accounting period they are incurred. They are deducted from the revenue incurred during the same period. An accountant records each expense separately and then adds them all into the total period cost, which appears on the income statement for that accounting period.
This video provides a relatively simple, qualitative explanation of how expenses are categorized as either product (manufacturing) costs versus period (non-manufacturing) costs within a production firm and is intended for students just beginning a course in managerial accounting.
Costs may be classified as product costs and period costs. This classification is usually used for financial accounting purposes. A brief explanation of product costs and period costs is given below: Product costs: Product costs (also known as inventoriable costs) are those costs that are incurred to acquire or manufacture a product.
Cost accounting is the process of recording, classifying, analyzing, summarizing, and allocating costs associated with a process, and then developing various courses of action to control the costs. Its goal is to advise the management on how to optimize business practices and processes based on cost efficiency and capability.
The period costs are usually associated with the selling function of the business or its general administration. The period costs are reported as expenses in the accounting period in which they 1) best match with revenues, 2) when they expire, or 3) in the current accounting period.
If it is not, then it is a period cost. If it is a product cost, determine if the cost is a direct material or direct (touch) labor. If it is neither of these, it should be classified as manufacturing overhead. If it is a period cost, determine if the cost is related to selling the product or the general administration of the company.
There are two types of expenses in managerial accounting: period costs and product costs. A period cost is defined as all costs in the profit and loss statement that is not a cost directly associated with a product, also known as "Sales, General and Administrative costs" (SG&A).