Differences between Product Costs and Period Costs

The difference between product cost and period cost is categorized by importance, nature and basis of time and volume costs, inclusion of manufacturing costs, and valuation (Drury 189). There are many differences regarding inventory between product cost and period cost. The first difference between the two is in the definition. Product cost refers to the cost attributed to the product and associated with inventory values ​​such as: B. Direct Materials, Labor and Overhead. Periodic costs, on the other hand, are independent of production and cannot be assigned to products. Volume vs. Time Based Product costs are considered in terms of volume since the costs remain the same in terms of unit price but differ in the total value. The period costs are looked at in terms of time because as per the matching principle, the period costs are ascertained and charged in the accounting period in which they are incurred.

Variable Verses Fixed Nature of the Costs

The product costs are also variable as the costs change with the activity level. On the contrary, the period costs are fixed and independent of the change in the activity level.

Cost of Production

Moreover, the product costs are part of the cost of production and comprise of the manufacturing. The period costs do not form part of the cost of production and include the non-manufacturing costs such as office, administration, selling, and distribution expenses.

Valuation

The valuation of firms using their inventory as part of the assets creates a major difference between the product costs and the period costs. During the valuation, only product costs are included since they can be traced to the final cost of inventory, for example, the cost of placing an order of inventory.

Conclusion

The main difference between the product and period costs is that product costs are part of the cost of production while the period costs are not. According to Drury (25), as far as inventory costs are concerned, all the costs which are not product costs are period costs.

Work Cited

Drury, Colin M. Management and cost accounting. Springer, 2013.