Costs may be classified as product costs and period costs. This classification is usually used for financial accounting purposes. A brief explanation of product costs and period costs is given below: Product costs also known as inventoriable costs are those costs that are incurred to acquire or manufacture a product.
Product costs equal the sum of your direct materials costs, direct labor costs and manufacturing overhead costs.
Direct Materials Direct materials are the materials your small business uses to manufacture a product that you can trace directly to the product, such as the bicycle tires on a specific bicycle. Add together the costs of the direct materials you used over a particular period, such as one month, to determine your total direct materials costs.
For example, assume you make bicycles. Direct Labor Direct labor costs are the total costs you incur to employ the workers that directly assemble or manufacture your products.
Add together these costs you incurred for the month to determine your total direct labor costs. Manufacturing Overhead Manufacturing overhead costs are those necessary to making a product, but that you cannot trace directly to a specific product. Examples include indirect materials, such as masking tape, and indirect labor costs, such as the costs to employ a maintenance worker.
Examples of other overhead costs are property taxes, rent and utilities. Add together each manufacturing overhead cost you incurred during the month to determine total manufacturing overhead costs.
Product Cost and Product Cost per Unit Add together your total direct materials costs, your total direct labor costs and your total manufacturing overhead costs that you incurred during the period to determine your total product costs.
Divide your result by the number of products you manufactured during the period to determine your product cost per unit. Assume you manufactured bicycles during the same period.A: Period costs and product costs are two categories of costs for a company that are incurred in producing and selling their product or service.
All costs necessary to secure customer orders and get the finished product or service into the hands of the customer, such as sales commission, advertising, and depreciation of delivery equipment and finished goods warehouse.
If the price for your product or service doesn't cover costs, your cash flow will be cumulatively negative, you'll exhaust your financial . The product costs of direct materials, direct labor, and manufacturing overhead are also "inventoriable" costs, since these are the necessary costs of manufacturing the products.
Period costs are not a necessary part of the manufacturing process.
Cost of Goods Sold, (COGS), can also be referred to as cost of sales (COS), cost of revenue, or product cost, depending on if it is a product or service. It includes all the costs directly involved in producing a product or delivering a service.
Period costs: The costs that are not included in product costs are known as period webkandii.comy, these costs are not part of the manufacturing process and are therefore treated as expense for the period in which they arise.