Product vs. Period Costs Video - ExamPrep.ai CPA Review

Video: Product vs. Period Costs

Distinguish product costs from period costs using a TV-manufacturing example. Follow normal direct materials, direct labor and manufacturing overhead into inventory, then cost of goods sold when the product is sold. Compare factory cleaning with sales-office cleaning to see why a cost’s purpose matters. Clarify capitalization and the treatment of abnormal production waste.

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Instructor: Nick Palazzolo

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All right, I've hinted at these a little bit, but now let's put names to them. Product costs and period costs. Think capitalization versus expensing. The same distinction shows up in financial accounting; here we're applying it to inventory. Say we spend a hundred dollars. Does it go on the balance sheet or the income statement? Well, it's a cost, so you might think expense. Not always. If it's a normal cost of making a product for sale, we first record it as inventory. Then, when we sell that product, the cost moves to the income statement as cost of goods sold. So it becomes an expense, but the timing is different. That's what capitalizing means: recording a cost as an asset. That asset could be a machine or a vehicle in another problem. Here, it's inventory. Extending an asset's useful life isn't the test we're using for these inventory costs. You can use cost accounting for services, too, but our example here is a manufacturer. Picture the TV factory. Plastic for the TV is direct material. The people assembling it give us direct labor. Electricity running the production equipment, and ordinary cleaning supplies for the factory floor, are manufacturing overhead. All three are product costs. Direct and indirect is a different distinction. Just because we can't trace a cost to one specific TV doesn't make it a period cost. Now take those same cleaning supplies and use them in the sales office. Same bottle, different job. That cost supports the selling operation, not manufacturing. It's a period cost, so we expense it in the period we incur it. Advertising and general office administration fit on that side as well. We're talking about normal manufacturing costs here. Abnormal production waste is expensed rather than included in inventory; we'll look at spoilage next. So when a question

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