Period costs and product costs are two categories of costs for a company that are incurred in producing and selling their product or service. Below, we explain each and how they differ from one another.
- Product costs are those directly related to the production of a product or service intended for sale.
- Period costs are all other indirect costs that are incurred in production.
- Overhead and sales & marketing expenses are common examples of period costs.
Product costs are the direct costs involved in producing a product. A manufacturer, for example, would have product costs that include:
- Direct labor
- Raw materials
- Manufacturing supplies
- Overhead that is directly tied to the production facility such as electricity
For a retailer, the product costs would include the supplies purchased from a supplier and any other costs involved in bringing their goods to market. In short, any costs incurred in the process of acquiring or manufacturing a product are considered product costs.
Product costs are often treated as inventory and are referred to as "inventoriable costs" because these costs are used to value the inventory. When products are sold, the product costs become part of costs of goods sold as shown in the income statement.
Period costs are all costs not included in product costs. Period costs are not directly tied to the production process. Overhead or sales, general, and administrative (SG&A) costs are considered period costs. SG&A includes costs of the corporate office, selling, marketing, and the overall administration of company business.
Period costs are not assigned to one particular product or the cost of inventory like product costs. Therefore, period costs are listed as an expense in the accounting period in which they occurred.
Other examples of period costs include marketing expenses, rent (not directly tied to a production facility), office depreciation, and indirect labor. Also, interest expense on a company's debt would be classified as a period cost.
Considerations in Production Costs Calculations
Both product costs and period costs may be either fixed or variable in nature.
Production costs are usually part of the variable costs of business because the amount spent will vary in proportion to the amount produced. However, the costs of machinery and operational spaces are likely to be fixed proportions of this, and these may well appear under a fixed cost heading or be recorded as depreciation on a separate accounting sheet.
The person creating the production cost calculation, therefore, has to decide whether these costs are already accounted for or if they must be a part of the overall calculation of production costs.
Also, fixed and variable costs may be calculated differently at different phases in a business's life cycle or accounting year. Whether the calculation is for forecasting or reporting affects the appropriate methodology as well.