The most common product costs are direct materials, direct labor, and manufacturing overhead. Both of these costs are considered period costs because selling and administrative expenses are used up over the same period in which they originate. Period costs are not assigned to one particular product or the cost of inventory like product costs. Therefore, period costs are listed as an expense in the accounting period in which they occurred. The matching principle is based on the accrual concept and states that costs incurred to generate a particular revenue should be recognized as expense in the same period that the revenue is recognized.

• In a nutshell, we can say that all the costs which are not product costs are period costs.
• We need to first revisit the concept of the matching principle from financial accounting.
• Managing a business requires keen awareness of its cost structure.
• And, the relationship between these costs can vary considerably based upon the product produced.
• However, if these costs become excessive they can add significantly to total expenses and they should be monitored closely so managers can take action to reduce them when possible.

Eric Sottile has a bacholors degree in accounting from the University of Kentucky and a bachelors degree in finance from the University of Kentucky. Eric works for a public accounting firm and has passed his CPA exams with an average score of 94. The articles and research support materials available on this retail accounting site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. These costs should be monitored closely so managers can find ways to reduce the amount paid when possible.

Accurate pricing for your products

These items are directly traceable or assignable to the product being manufactured. Product costs only become an expense when they are sold and become period costss. Period costss are all the costs that are expired non product costs.

It is better to relate period costs to presently incurred expenditures that relate to SG&A activities. These costs do not logically attach to inventory and should be expensed in the period incurred. Review monthly expenses to ensure that period costs are expensed in the correct periods. Ensure that period costs are expensed in the same period that they are incurred. 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.

Product Cost vs. Period Cost

At this point the various material, labor, and overhead costs required to make the product are finally treated as expenses. Until that point, these costs are in inventory accounts on the balance sheet. All costs of manufacturing a product other than direct materials and direct labor, such as indirect materials, indirect labor, factory utilities, and depreciation of factory equipment.

This means that if a cost is incurred to acquire or make some thing that will eventually be sold, then the cost should be recognized as an expense only when the sale takes place-that is, when the benefit occurs. According to the same source, period costs have a direct effect on a company’s financial performance. As a small business owner, you want to keep this cost low and avoid unnecessary expenses. Doing so allows you to invest more in product development and generate higher profits.

How to Distinguish Between Types of Inventory Cost and Period Cost

If you’re currently in business, you need a good way to manage costs. While using accounting software is the best method for managing costs, even if you’re still recording transactions in a manual ledger or using a spreadsheet application, you can learn to manage business costs properly. Period costs are calculated by identifying costs classified as period costs. Ongoing communication with suppliers – By staying in constant communication with suppliers, businesses can make sure they are aware when period costs are starting to get out of hand.

Production costs are usually part of the variable costs of business because the amount spent will vary in proportion to the amount produced. However, the costs of machinery and operational spaces are likely to be fixed proportions of this, and these may well appear under afixed costheading or https://www.scoopearth.com/the-importance-of-retail-accounting-in-improving-inventory-management/ be recorded as depreciation on a separate accounting sheet. Period costs should be recorded on the appropriate balance sheet account to provide an accurate representation of the business’s expenses. In other words, period costs are related to the services consumed over the period in question.