Question

Explain the difference between product costs and period costs as they relate to the income statement. Are these terms synonymous with short-run and long -run?

Answer 1

Product costs are those that are necessary to manufacture the product. It includes, direct material, direct labor and manufacturing overhead. They are added to the cost of the product; that is they are inventoriable.

In contrast, period costs are those that are unrelated to manufacture. They are not in any way related to manufacture. Examples are advertising costs, selling costs, administrative costs and so on.

No, they are not synonymous with short run and long run. For instance, product costs like R&D expense, patent amortization, depreciation are long run. Period costs can be short run also, like advertisement done for a product launch.