Product vs. Period costs: Differences and difficulties
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How are product costs different from period costs? What are examples of each? What makes product costing easy or difficult? Why?
Include scholarly references and practical implications.
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Solution Summary
Your discussion is 863 words and three references and gives you a discussion of product versus period costs as well as how product costs work from a simple to a complex costing system. The importance of product costs is considered.
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Teasing out product cost and period costs can range from simple to mind-bogging. I will give you a range of examples from simple to very hard, starting with the simple.
Theory
Period costs are costs that are expensed during the period. In reporting income, period costs or expenses during the period are separated into Cost of Goods Sold (product costs expensed during the period) and non-product costs (operating expenses). Often, period costs refer to non-product costs but this is a misconception since product costs become period costs when they are sold. So, COGS is both a product cost and a period cost.
Product costs are all the costs required to bring the product into sell-able condition. This can be one cost or thousands. Getting this amount correct has large implications for business success and firms spend a lot of time and money getting it right.
One way to evaluate if a cost is a product cost or not is to ask: Would this cost go away if the product were no longer made by us? For instance, if John Deere hired a firm in Singapore to make the lawnmowers and tractors to their specifications with the John Deere logo and so forth, and John Deere would just pay for each lawnmower and tractor purchased from the Singapore firm, what costs would still be needed by John Deere? Those would be non-product/period costs. For instance, does John Deere still need the factory? No. The labor that assembled the items? No. In ...
Education
- BSc, University of Virginia
- MSc, University of Virginia
- PhD, Georgia State University
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