Product vs. Period Cost

Manufacturers, retailers, and any company with inventory must distinguish between product costs and period costs. The difference between product costs and period costs has to do with the timing (when the cost is expensed).

A product cost is assigned to inventory, and is expensed when the product is sold through Cost of Goods Sold. For a manufacturer, product costs include all manufacturing costs: direct materials, direct labor, and manufacturing overhead. These costs first become an asset (inventory) and are expensed when the asset is sold.

A period cost is any cost that is not a product cost. Period costs are expensed when they are incurred. Selling, general, and administrative expenses are an example of a period cost. If a manufacturer pays a sales commission to one of its sales staff, this cost is expensed and does not attach to inventory.—
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