Product Cost vs. Period Cost: What's the Difference?
Edited by Aimie Carlson || By Harlon Moss || Published on November 28, 2023
Product cost refers to costs directly tied to creating a product, while period cost pertains to costs incurred during a specific time frame regardless of production.
Key Differences
Product cost encompasses all the expenses directly related to the manufacturing or production of an item. On the contrary, period cost relates to the expenses that a company incurs over a specific period, irrespective of how many goods they produce.
Considering an item's selling price, the product cost comprises the expenses that go into its creation, from raw materials to labor. In contrast, period cost isn't linked to production volume but instead to a company's operational timeframe, like monthly or annually.
From an accounting perspective, product costs are often included in inventory valuations. In contrast, period costs, since they don't tie directly to production, are usually expensed in the period they occur.
Industries that focus on manufacturing or production pay close attention to product costs as they determine the cost of goods sold (COGS). Businesses, irrespective of the industry, deal with period costs as they encompass rent, salaries, and other time-based expenses.
Product cost can fluctuate based on production efficiency, quantity, and input costs. Simultaneously, period costs can remain fixed, like monthly rent, or variable, like quarterly advertising campaigns, but remain independent of production volumes.
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Comparison Chart
Relation
Directly tied to production.
Related to time, not production.
Examples
Raw materials, labor, manufacturing overhead.
Rent, salaries, advertising.
Accounting
Capitalized in inventory and COGS.
Expensed in the period they occur.
Fluctuation
Varies with production levels.
Independent of production volumes.
Purpose
Determine cost of producing an item.
Manage and track operational expenses over time.
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Product Cost and Period Cost Definitions
Product Cost
The direct expenses of producing an item.
The product cost for the shoes includes leather, laces, and labor.
Period Cost
Operational costs expensed as incurred.
The quarterly financials showed a spike in period cost due to training programs.
Product Cost
Cumulative cost of materials, labor, and overhead for an item.
Inefficiencies in the factory increased the product cost of the gadgets.
Period Cost
Costs unrelated to product creation or volume.
The CEO's annual salary is a fixed period cost.
Product Cost
Costs capitalized in inventory until sold.
The company's financial statement showed a high product cost in inventory.
Period Cost
Time-based business expenses, not production-based.
Advertising campaigns in December resulted in high period costs.
Product Cost
Amount spent to manufacture goods.
By sourcing cheaper materials, the company reduced its product cost.
Period Cost
Costs that remain constant irrespective of production.
Even if the factory halts production, the period cost for utilities remains the same.
Product Cost
Expenses that vary with production volume.
When production doubled, the product cost also saw a significant rise.
Period Cost
Expenses recognized in a specific time frame.
The monthly rent for the warehouse is a period cost.
FAQs
Can product cost change over time?
Yes, product cost can fluctuate based on factors like material prices, labor rates, and production efficiency.
What is product cost?
Product cost refers to the total expenses directly associated with producing a specific item.
How is period cost defined?
Period cost pertains to the expenses a company incurs during a specific timeframe, unrelated to production.
How does product cost affect selling price?
Product cost is a primary component of the cost of goods sold (COGS), influencing the final selling price of an item.
When are period costs recognized in accounting?
Period costs are typically expensed in the accounting period they occur.
Can period costs impact a company's profit?
Yes, high period costs can reduce profits, especially if they don't result in increased revenue or efficiencies.
Are period costs always fixed?
No, period costs can be fixed, variable, or mixed, but they don't depend on production volumes.
Why is product cost important for manufacturers?
Product cost helps determine profitability and informs pricing strategies for manufacturers.
Can a company have high product costs and low period costs?
Yes, a company might invest heavily in production but have minimal administrative or other non-production expenses.
Can advertising be a period cost?
Yes, advertising expenses are considered period costs as they are time-based, not production-based.
Do service companies have product costs?
Typically, service companies don't have "product costs" in the traditional sense but may have costs related to service provision.
Is period cost the same as operational cost?
While all period costs are operational costs, not all operational costs are period costs. Period costs are strictly time-based.
Are machine maintenance costs considered product costs?
If the maintenance directly supports production, it's a product cost. Otherwise, it's a period cost.
How do companies manage period costs?
Companies set budgets, track expenses, and analyze variances to manage period costs effectively.
What are some examples of product costs?
Examples include raw materials, direct labor, and manufacturing overhead.
How is product cost different from selling cost?
While product cost involves production expenses, selling cost relates to expenses incurred to sell that product.
Can period costs be deferred?
Generally, period costs are expensed as incurred, but in certain circumstances, they may be deferred.
How do period costs affect income statements?
Period costs directly impact the expense section of the income statement, influencing net income.
Do period costs include research and development?
Yes, research and development costs are typically considered period costs as they are expensed in the period incurred.
Can an item's product cost be higher than its selling price?
Yes, companies might sometimes sell products at a loss due to various strategic reasons.
About Author
Written by
Harlon MossHarlon is a seasoned quality moderator and accomplished content writer for Difference Wiki. An alumnus of the prestigious University of California, he earned his degree in Computer Science. Leveraging his academic background, Harlon brings a meticulous and informed perspective to his work, ensuring content accuracy and excellence.
Edited by
Aimie CarlsonAimie Carlson, holding a master's degree in English literature, is a fervent English language enthusiast. She lends her writing talents to Difference Wiki, a prominent website that specializes in comparisons, offering readers insightful analyses that both captivate and inform.
