Product costs and period costs

A manufacturer’s product costs are the direct materials, direct labor, and manufacturing overhead used in making its products. (Manufacturing overhead is also referred to as factory overhead, indirect manufacturing costs, and burden.) The product costs of direct materials, direct labor, and manufacturing overhead are also costs, assigned to inventory (work-in-progress and finished goods) since these are the necessary costs of manufacturing the products.

Period costs are not a necessary part of the manufacturing process. As a result, period costs cannot be assigned to the products or to the cost of inventory. The period costs are usually associated with the selling function of the business or its general administration. The period costs are reported as expenses in the accounting period in which they:

  1. best match with revenues,
  2. when they expire, or
  3. in the current accounting period.

In addition to the selling and general administrative expenses, most interest expense is a period expense.

Leave a Reply

Your email address will not be published. Required fields are marked *