Product vs Period Costs Accounting for Managers

Indirect labor consists of the cost of labor that cannot, or will not for practical reasons, be traced to the products being manufactured. Period costs are not incurred directly with the product or are not directly responsible for product manufacturing. For example, the advertisement cost here is not part of the online gaming application. Further, it is also stated that these occur during Indian premier league matches every year, and hence they are incurred periodically.

Comparison to Product Costs

Since the expense covers a two year period, it should be recognized over both years. Indirect materials are the materials that are too hard to trace to the product to be direct materials. This includes things like glue, solder (a low-melting alloy used to join metals together), and nails. What about the rest of the workers that were Bakery Accounting mentioned in our list above?

Administrative Expenses

In contrast, period costs are expensed in the period in which they are incurred, regardless of when the products or services are sold. Proper classification of costs is essential for businesses to improve profitability. Period costs are systematically what are period costs recorded in the income statement as expenses in the period they are incurred.

Are Period Costs Considered Liabilities?

If the products are not sold right away, then these costs are instead capitalized into the cost of inventory, and will be charged to expense later, when the products are eventually sold. Differentiating between period costs and product costs is crucial for accurate financial reporting and decision-making. By understanding the timing and allocation of these costs, businesses can assess their profitability and make retained earnings balance sheet informed choices regarding resource allocation and pricing strategies.

Usually, these consist of all items in the income statement that aren’t a part of the cost of goods sold. For example, depreciation, interest expenses, freight charges, etc., fall under period costs. Since these costs don’t become a part of product costs, they form period costs instead. Product cost comprises of direct materials, direct labour and direct overheads. Period costs are based on time and mainly includes selling and administration costs like salary, rent etc. These two type of costs are significant in cost accounting, that most people don’t understand easily.