Assume that you must take a presentation to the marking staff explaining the difference between product and period costs. Your supervisor tells you the marking staff would also like clarification regarding prime and conversion costs and an explanation of how these terms fit with product and period cost. You are told that many on the staff are unable to classify costs in their merchandising activities.
Product costs means all costs incurred for production of specific quantity of goods or service. Product cost is the cost of all the different components which make up the product i.e., the cost of material and manufacturing process incurred for the manufacture of product. If the products are purchased from outside market rather than manufacturing the same, then cost of purchase is the product cost. Different components of product costs are:
1. Material costs
2. Manufacturing costs
3. Component costs
This solution discusses prime and conversion costs and how they fit in with product and period costs.