Product vs. Period Costs: Classification Practice
Product Costs (inventory asset) vs. Period Costs (expenses)
Now comes an opportunity to make sure you clearly understand the distinction between product costs and period costs.
Required: Classify each of the following manufacturing company cost items as a product cost or a period cost and click on the link of your choice to see if you are correct.
1. Office Building Depreciation
Product +
Incorrect. It's outside the factory, so it must be a period cost (an operating expense).
Period +
Correct! It's outside the factory, so it must be a period cost (an operating expense).
2. Factory Assembly Line Wage
Product +
Correct! It's inside the factory, so it must be a product cost. In this case, it is direct labor.
Period +
Incorrect. It's inside the factory, so it must be a product cost. In this case, it is direct labor.
3. Factory Janitorial Salaries
Product +
Correct! It's inside the factory, so it must be a product cost. In this case, it is manufacturing overhead.
Period +
Incorrect. It's inside the factory, so it must be a product cost. In this case, it is manufacturing overhead.
4. Office Property Taxes
Product +
Incorrect. It's outside the factory, so it must be a period cost (an operating expense).
Period +
Correct! It's outside the factory, so it must be a period cost (an operating expense).
5. Office Supplies Used
Product +
Incorrect. It's outside the factory, so it must be a period cost (an operating expense).
Period +
Correct! It's outside the factory, so it must be a period cost (an operating expense).
6. Factory Building Depreciation
Product +
Correct! It's inside the factory, so it must be a product cost. In this case, it is manufacturing overhead.
Period +
Incorrect. It's inside the factory, so it must be a product cost. In this case, it is manufacturing overhead.
7. Factory Property Taxes
Product +
Correct! It's inside the factory, so it must be a product cost. In this case, it is manufacturing overhead.
Period +
Incorrect. It's inside the factory, so it must be a product cost. In this case, it is manufacturing overhead.
8. Office Janitorial Salaries
Product +
Incorrect. It's outside the factory, so it must be a period cost (an operating expense).
Period +
Correct! It's outside the factory, so it must be a period cost (an operating expense).
9. Factory Supplies Used
Product +
Correct! Factory supplies are not direct materials, or it would be called raw materials or direct materials. Factory supplies are indirect materials. It's inside the factory, so it must be a product cost. In this case, it is manufacturing overhead.
Period +
Incorrect. Factory supplies are not direct materials, or it would be called raw materials or direct materials. Factory supplies are indirect materials. It's inside the factory, so it must be a product cost. In this case, it is manufacturing overhead.
10. Advertising Cost
Product +
Incorrect. The reason for saying ads already run is because advertising costs for ads to be run in the future would be prepaid advertising, a current asset. After the ads are run, it's used up. It's outside the factory, so it must be a period cost (an operating expense).
Period +
Correct! The reason for saying ads already run is because advertising costs for ads to be run in the future would be prepaid advertising, a current asset. After the ads are run, it's used up. It's outside the factory, so it must be a period cost (an operating expense).
In summary, the distinction between product and period costs is very clear. If the cost is incurred to run the factory, it is a product cost and will go into the inventory asset account. If it's incurred outside the factory, it's a period cost and will go into expenses on the income statement.
