Product Pricing Strategies
Product Costs vs Period Costs
In accounting, all costs incurred by a company can be categorized as either product costs or period costs. The two types of costs are recorded differently.
Product costs are applied to the products the company produces and sells. Product costs refer to all costs incurred to obtain or produce the end-products. Examples of product costs include the cost of raw materials, direct labor, and overhead. Before the products are sold, these costs are recorded in inventory accounts on the balance sheet. They are treated like assets. Product costs are sometimes referred to as “inventoriable costs.” When the products are sold, these costs are expensed as costs of goods sold on the income statement.
Period costs are the costs that cannot be directly linked to the production of end-products. Essentially, a period cost is any cost that is not a product cost. 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.
In sum, product costs are inventoried on the balance sheet before being expensed on the income statement. Period costs are just expensed on the income statement.