Costs of business are categorized as period costs or product costs as far as financial accounting is concerned. These categorizations occur on the basis of whether the expense is capitalized to the cost of saleable products.
What are Product Costs?
Costs incurred in the process of acquiring or manufacturing a product are considered product costs. Since these costs are often treated as inventory and do not appear on a company’s income statement until the final product is sold, you may sometimes see these referred to as “inventoriable costs.” A classic manufacturing firm has product costs consisting of materials used in the production process, or direct materials; labor expenses that are directly tied to manufacturing; and indirect costs such as manufacturing overhead. These are general concepts; the actual field of assigning costs to inventory can be very complex.
What are Period Costs?
All costs not included in product costs are called period costs. Since these costs are not involved in the production process, they are not treated differently on an income statement following a sale. Rather, they are treated as actual expenses in the period in which they arise, which is why they are called period costs.
According to U.S. generally accepted accounting principles, or GAAP, all selling and administrative costs are treated as period costs. Common examples of period costs include marketing expenses, rent, office depreciation and indirect labor. Even if physical inventories are composed of items that are treated as product costs, the actual administration of warehouses and inventory management expenses are considered period costs.