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Product Costs vs Period Costs

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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.

Product Costs vs Period Costs

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Product Costs

See Also:
Economic Production Run (EPR)
Product Pricing Strategies
Bank Charge
Completed Production Method
Inventory Shrinkage

Product Costs Definition

Define product costs as the total costs of creating products, is an essential factor in the success of a manufacturing business. Some of these components include all direct costs, from raw materials to labor and even transportation, included in creating a finished product ready for sale.

Product Cost Explanation

Explain product cost as the entire cost spectrum for a product, can have varying levels of complexity. The product cost concept will vary greatly depending on the type of product produced.

For a simple injection-molded plastic product, product cost per unit will include raw plastics, transportation from the raw material maker to the manufacturing plant, labor, energy used by manufacturing machines, and more.

For a software product maker, a product cost breakdown will include development labor, energy, and any other costs directly associated with making the piece of software.

Any business which makes products has a product cost. To assure efficient and profitable systems it is in the best interest of the business owner to monitor these costs. From this information a company can solve internal problems and ultimately increase the company’s bottom line (Revenue – Costs = Profit).

Product Costs Formula

No single product cost formula seems to exist. More, it is the combination of all of the costs which add up to create a product. This can widely vary based on industry, production method, and more.

An industry average may be available to perform product cost analysis as compared to standard practices. This way, a company can see if they are meeting common standards. From here a company can attempt to become more efficient than the industry standard by enacting some best practices.

Product Cost Example

Sterling is the owner of a web development company. Though he works with intangible assets, mostly, he still has a product cost equation. His product cost effects his bottom line as much as any manufacturing firm.

On average, Sterling charges clients $10,000 for a perfect web application which is ready to be deployed. In comparison, it usually costs him about $3,000 to create one of these applications. Sterling would like to reduce this in order to increase company profits.

Sterling looks at his main factor: labor. By hiring better developers Sterling will slightly increase labor costs but also expects the developer to produce 10% more in one hour than his current employees.

On the other hand, by purchasing new development software Sterling expects to also increase average worker productivity by 10%.

Choosing An Option

In this example, Sterling will choose an option based on his preferences. Rather than interviewing an entire new team he opts for the new system. This way he will not have to waste time, energy, and create a hassle for his current employees. He chooses this option after speaking with his CFO, who informs him that the cost of the new system will be virtually the same as the cost of hiring new employees. Specifically, the software will cost a total of $160,000. He will have to spend $159,500 on project manager time, new employee training, and processing.

Sterling is confident that he has made the right decision. He looks forward to his new software and the happy faces of the employees he appreciates.

To learn how to price for profit, download our Pricing for Profit Inspection Guide.

Product Costs

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Product Costs

 

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Inventoriable Costs

See also:
Just in Time Inventory System
Perpetual Inventory System
Inventory Turnover Ratio Analysis
Days Inventory Outstanding
LIFO vs FIFO

Inventoriable Costs

In accounting, inventoriable costs refer to all costs incurred to obtain or produce the end-products. Apply these costs to the products the company produces and sells. The cost of raw materials, direct labor, and part of overhead are all examples.

Before the products are sold, these costs are recorded in inventory accounts on the balance sheet and are treated like assets. You can also use product costs instead. When the products are sold, expense these costs as costs of goods sold on the income statement.

In sum, these costs are inventoried on the balance sheet. This occurs before being expensed on the income statement. Compare inventoriable costs, or product costs, to period costs. They are not directly linked to production. They are expensed in the period in which they are incurred.

If you want to check whether your unit economics are sound, then download your free guide here.

inventoriable costs

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