Rent can be a period cost or a product cost depending on what the rented building is used for. If the rented building is used as a manufacturing facility, it is a product cost. If the rented building is used as office space, it is a period cost. As a general rule, costs are recognized as expenses on the income statement in the period that the benefit was derived from the cost.

However, these costs are still paid every period, and so are booked as period costs. The preceding list of period costs should make it clear that most of the administrative https://marketresearchtelecast.com/financial-planning-for-startups-how-accounting-services-can-help-new-ventures/292538/ costs of a business can be considered period costs. When inventory is purchased, it constitutes an asset on the balance sheet (i.e., “inventory”).

Difference Between Product Cost and Period Cost

Looking at these expenses the utilities for the manufacturing facility and the production worker’s wages are both product costs because these are manufacturing overhead costs and direct labor costs. Utilities for the retail shop as well as the cashier’s wages are period costs. Period costs are the costs that cannot be directly linked to the production of end-products. Examples of period costs include sales costs and administrative costs. Period costs are always expensed on the income statement during the period in which they are incurred.

There are types of period costs that may not be included in the financial statements but are still monitored by the management. They are also included in determining the amount of revenue that has been earned when an asset is sold, which in turn can affect both revenues and costs in future accounting periods. Overhead, or the costs to keep the lights on, so to speak, such as utility bills, insurance, and rent, are not directly related to production.

What could be considered a period expense?

Other general and administrative costs like office salaries can’t be allocated to products. Thus, it is fair to say that product costs are the inventoriable manufacturing costs, and period costs are the nonmanufacturing costs that should be expensed bookkeeping for startups within the period incurred. This distinction is important, as it paves the way for relating to the financial statements of a product producing company. And, the relationship between these costs can vary considerably based upon the product produced.

Now that we have taken a bird’s eye view of the matching principal, let’s look into the meanings of and difference between product costs and period costs. Materials like oil, nails or screws are hard to be account for and thus their cost cannot be traced to cost object easily and therefore treated as indirect material. Product costs, on the other hand, are expenses that are incurred to manufacture a good and can typically be traced back to a specific product. In other words, product costs are the expenses incurred to produce something.

Types of Period Costs That Should Be Monitored

Examples of period costs include selling costs and administrative costs. These costs are identified as being either direct materials, direct labor, or factory overheads, and they are traceable or assignable to products. Both product costs and period costs may be either fixed or variable in nature.