Product Costs vs Period Costs: What Are the Differences?

TL;DR: Product costs are tied directly to manufacturing and inventory, while period costs relate to time-bound operating expenses. Knowing the difference helps Indian SME manufacturers price better, control margins, and report finances correctly.

Product Costs vs Period Costs: Key Differences

What Is a Product Cost?

Product costs are expenses incurred to manufacture or acquire goods. These typically include raw materials, direct labour, factory utilities, and manufacturing supplies. Because these costs are attached to inventory, they are capitalised and move to cost of goods sold when the product is sold.

In short, product costs sit on the balance sheet as inventory until sales happen.

What Is a Period Cost?

Period costs are expenses that are not linked to making a specific product. They relate to running the business during a particular time period. Examples include sales and marketing expenses, corporate office costs, administration salaries, rent, and interest.

These costs are expensed in the period they are incurred and do not form part of inventory valuation.

Considerations in Cost Calculations

Both product and period costs can include fixed and variable elements. Production volumes affect variable costs, while depreciation and facility expenses remain fixed. The treatment can also change based on reporting needs versus forecasting or budgeting exercises.

Examples of Product Costs and Period Costs

Product cost examples include direct materials, factory labour, and manufacturing equipment depreciation. Period cost examples include office rent, administrative salaries, utilities, marketing spends, and audit fees.

FAQs

For how long are period costs recorded?

Period costs are recorded in the specific accounting period in which they occur, such as the month or quarter of the expense.

Why is overhead considered a period cost?

Overhead supports ongoing operations and is not directly traceable to individual products, so it is treated as a period cost.

Is labour a period cost or a product cost?

Direct labour involved in manufacturing is a product cost, while administrative or office labour is a period cost.

Is depreciation a period cost?

Depreciation of office assets is a period cost. Depreciation of manufacturing equipment is treated as a product cost.

How do product costs and period costs affect financial statements?

Product costs flow into cost of goods sold when inventory is sold, while period costs appear under operating expenses.

Why is it important to distinguish between product and period costs?

Correct classification helps with accurate pricing, margin analysis, cost control, and compliant financial reporting.