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Product versus period costs, fixed versus variable costs

At a dinner party you hosted, a friend of yours who is a college accounting professor—upon hearing you had started your own business—told you to make sure to properly categorize product versus period costs and fixed versus variable costs. The friend did not have time to explain the difference or the importance of proper categorization to you.

Thinking this would be important information to pass on to your partner, do the following:
Research the topic.
Write a memo to your partner covering all of the following: Write a description of the difference between product and period costs and examples of each.
Include the definition of fixed versus variable costs along with examples of each in manufacturing, service, and retail businesses.
Explain how the financial results of a business would be reported differently if costs were not properly categorized.

Solution Preview

Dear Partner,

I understand that you would like to understand some technical terms we use. I have provided some comments and examples for you below.

Product vs period costs

Product costs are the cost of inventory sold to customers. In a retail firm, this is just purchase cost. In a manufacturing firm, this is the cost of materials, labor and factory overhead to produce the goods.

Period costs are the customary business costs to generate business transactions with customers, vendors, authorities, and employees for the period. That is, what are the costs to advertise, display, ship and service the product for the period. These are expired costs that are not product costs. That is, they have been used up and do not benefit a future ...

Solution Summary

Your discussion is 435 words and two references and explains the terms and then discusses how a misclassification of any of these would change profits and forecasts.

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