Reference no: EM13830624

PRODUCT COSTS VERSUS PERIOD COSTS

The terms product costs and period costs are helpful in explaining the difference between manufacturing costs and operating expenses. In a manufacturing environment, product costs are those costs incurred to manufacture inventory. Thus, until the related goods are sold, product costs represent inventory. As such, they are reported in the balance sheet as an asset. When the goods are ultimately sold, product costs are transferred from the balance sheet to the income statement, where they are deducted from revenue as the cost of goods sold. Operating expenses associated with time periods, rather than with the production of inventory, are referred to as period costs . Period costs are charged directly to expense accounts on the assumption that their benefit is recognized entirely in the period when the cost is incurred. Period costs include all selling expenses, general and administrative expenses, interest expense, and income tax expense. In short, period costs are classified in the income statement separately from cost of goods sold, as deductions from a company's gross profit.