Question

What would be the impact of classifying an item as a product cost versus a period cost?

Answer 1

Product costs:

1. Product costs are those costs that change with the change in number of units of production.

2. These costs are considered while taking long term or short term decisions.

3. Examples include direct material cost, direct labour costs, overhead costs that are directly linked to production facility.

Period costs:

1. Period costs are those costs that are fixed with respect to number of units of production.

2. These costs accountable on time basis(Viz., Per month or per annum basis)

3. Period costs are considered while taking long term decisions only.