Quick Study Guide
Product vs Period Costs

Product Costs: all costs that are required to make a product
Direct Material, Direct Labor, Manufacturing Overhead
Reported as inventory (inventoriable) on the balance sheet until sold
When sold these costs become cost of goods sold on income statement

Period Costs: Reported on the income statement as they are incurred, not related to manufacturing the product.

Corporate headquarters, cost of selling the product, shipping costs, administrative salaries, executive salaries, administrative office expenses, sales commissions, advertising

Warehouse costs and people who move inventory are period costs
Selling Costs – costs related to marketing & getting products to customer
Administrative Costs – general administration of the organization

Other Terms That Are Used:
Prime Costs – direct materials plus direct labor
Conversion Costs – direct labor plus manufacturing overhead
Direct Cost – easily and conveniently traced to one product (DM & DL)
Indirect Cost – cannot be easily and conveniently traced to one product
Manufacturing overhead and period costs are indirect costs.

PRODUCT COSTS – incurred to manufacture products. Anything that becomes part of the product, anyone who touches the product to make it, and all the costs of the facilities and management incurred to make the product.

Direct Materials – raw materials that become a part of the finished product
It is easy to track how much material is required to make one product.

Direct Labor – touch the product to make the product, operate the machine

Manufacturing Overhead – all costs of manufacturing the product except direct materials and direct labor. If cost has word “factory”, “plant”, “manufacturing”, as a descriptive word, the cost will be part of manufacturing overhead.

Indirect - You can not easily determine how much of these costs it takes to make one product. Dollars spent support many products.

Indirect labor – Involved in making the product at the plant, don’t touch the product to make it. Example: salaries of the managers, supervisors, QC

Indirect Material – Not easy to track how much it takes to make one product.