Identifying product and period costs

Product costs equal the sum of your direct materials costs, direct labor costs and manufacturing overhead costs. Product costs are further classified into direct material, direct labor and factory overhead. Whereas those which cannot be traced to a specific unit are indirect product costs.

Such costs are incurred on manufacturing process either directly as material and labor costs or indirectly as overheads. They include direct materials, direct labor, factory wages, factory depreciation, etc.

How Do You Determine a Product Cost in Managerial Accounting?

Opportunity Costs The costs discussed so far are historical costs which means they have been incurred in past and cannot be avoided by our current decisions.

Since the matching principle of accounting requires expenses to be matched to the revenue they generate, therefore it is necessary to expense product costs only when the revenue from the sale of products is realized. Period costs are thus expensed in the period in which they are incurred.

Period Costs Period costs are basically all costs other than product costs.

Cost and Cost Classifications

Example of period costs are advertising, sales commissions, office supplies, office depreciation, legal and research and development costs.

Thus direct material cost and direct labor cost are direct product costs whereas manufacturing overhead cost is indirect product cost. Add together each manufacturing overhead cost you incurred during the month to determine total manufacturing overhead costs.

For example, depreciation on fixed assets, etc. 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.

Assume you manufactured bicycles during the same period. Add together these costs you incurred for the month to determine your total direct labor costs. Costs are usually classified as follows: Conversion Costs Prime costs are the sum of all direct costs such as direct materials, direct labor and any other direct costs.

Represents the cost of the labor time spent on that product, for example cost of the time spent by a petroleum engineer on an oil rig, etc. This is achieved by debiting product costs to the cost of goods manufactured and thus expensed only at the time of sale of such goods.

In contrast to sunk costs are opportunity costs which are costs of a potential benefit foregone.

Identification of product cost (direct or indirect) and period cost.

Period Costs Product costs are costs assigned to the manufacture of products and recognized for financial reporting when sold. Period costs are on the other hand are all costs other than product costs.

Divide your result by the number of products you manufactured during the period to determine your product cost per unit. Examples include indirect materials, such as masking tape, and indirect labor costs, such as the costs to employ a maintenance worker. They include marketing costs and administrative costs, etc.

Examples of other overhead costs are property taxes, rent and utilities. Represents the cost of the materials that can be identified directly with the product at reasonable cost.

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. Thus these are our costs.

Examples include direct materials, direct labor, etc. Relevant in this regard is another cost classification, called sunk costs. Manufacturing Overhead Manufacturing overhead costs are those necessary to making a product, but that you cannot trace directly to a specific product.What is the difference between product costs and period costs?

A manufacturer's product costs are the direct materials, direct labor, and manufacturing overhead used in making its products. (Manufacturing overhead is also referred to as factory overhead, indirect manufacturing costs, and burden.).

Product VS Period Costs – Answer Key Identify the following as either a product (Inventoriable) Cost or a Period Cost. Product (Inventoriable) Cost Period Cost 1. The cost of the memory chips used in the product 9 2. Factory equipment maintenance costs. The difference between product costs and period costs August 05, / Steven Bragg The key difference between product costs and period costs is that product costs are only incurred if products are acquired or produced, and period costs are associated with the passage of time.

If it is a period cost, determine if the cost is related to selling the product or the general administration of the company. Look for terms like marketing or selling.

These terms indicate selling costs. Nov 22,  · An overview of product costs versus period costs, to accompany Chapter 17, Introduction. If you identify the item as a product cost, also indicate whether it is a direct or an indirect cost.

For example, the. Identification of product cost (direct or indirect) and period cost.

Identifying product and period costs
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