What is Product Cost?
The cost that can be directly assigned to a product is known as the product cost.
Product cost is usually the key indicator of product pricing. Product cost is mainly determined by the raw material input and labor input. However, it’s often the key driver of the price of the product.
On the basis of the product cost, the cost of work in process and finished products, as well as the cost of goods sold (COGS), is calculated. As a consequence, the product cost is often referred to as the inventoriable cost.
In the direct costing system, variable manufacturing costs, such as raw materials, direct labor, direct costs, variable overhead costs, and indirect factory costs, are treated as product costs.
In the absorption costing system, the product cost is calculated by adding the factory’s fixed or indirect costs to the variable production costs.
Examples of product costs are direct raw materials, wages, direct and indirect factory costs, factory electricity bills, etc.
What is the Period Cost?
The cost associated with a specific accounting period is referred to as the period cost.
Period costs include office and administrative costs, as well as sales and distribution costs. These costs are not associated with production costs.
Period costs are deducted from the respective period’s profits. In the direct costing system, however, the factory’s fixed overhead cost or indirect cost is often called period cost.
Examples of period costs are administrative expenses (i.e. salary, rent, telephone bill, office utilities, etc.), sales expenses, transportation expenses, etc.
Differences between Product Cost and Period Cost
There are many differences between product cost and period cost.
Below are the top 8 differences between product cost and period cost:
| SL No. | Point of Difference | Product Cost | Period Cost |
| 1. | Definition | The cost of raw materials, both direct and indirect costs, is referred to as product cost. | Period costs are described as office and administrative costs associated with a particular period of time, as well as sales and distribution costs. |
| 2. | Calculating the cost of the product | These costs are accounted for when determining the product’s cost. | Such costs are not taken into consideration when calculating the product’s cost. |
| 3. | Inclusion | Product cost includes both manufacturing and production costs. | Period cost includes all non-manufacturing costs such as administrative, marketing, sales, and distribution, etc. |
| 4. | Closing stock valuation | This cost is included in the valuation of the closing stock. | This cost is not included in the valuation of the closing stock. |
| 5. | Over distribution and under distribution | Product costs can lead to over and under allocation of factory indirect costs. | There is no over and under allocation of this expenditure. |
| 6. | Sales pricing | This cost is useful in deciding the product’s correct selling price. | This cost is inadequate for evaluating a product’s right selling price. |
| 7. | Results | This type of cost is carried forward to the next year by being included in the closing stock. | This type of cost comes to an end in the following year. |
| 8. | Asset | As the cost is included in the closing stock until the goods are sold, it is considered an asset. | It is not, in any case, considered an asset. |
I believe you now have a better understanding of the main differences between product cost and period cost after reading this post.
You can also read:
- Cost Accounting Vs Costing
- Top 30 Questions and Answers- Cost, Cost Terms, Concept and Classification
- What is Cost Accounting? and It’s Objective
