What is the difference between Product cost and Period cost?


Product costs or Inventoriable costs are all such costs that form part of the inventory.These are basically such costs that relates directly to the products and are incurred to produce such products and also include the costs that are incurred to bring these products into saleable condition (or simply present location and condition).

Examples are direct material costs, direct labour costs manufacturing overheads, carriage inwards and all such costs that contributes and are necessary to bring the inventory to their present location and condition for example handling costs, amortized development costs, borrowing costs in specific cases, storage costs where production process requires goods to be stored i.e. storage is part of the production process for example pickles.

In International Accounting Standard IAS 2 these costs are discussed under the name Cost of inventories. According to IAS 2 para 10:

The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Period costs or noninventoriable costs or nonmanufacturing overheads are all such costs that are not incurred in connection to the production. Rather they are connected and measured in context of time. These costs do not play any role in producing the asset or bringing the asset to its present location and condition. These are basically such costs that are non-manufacturing in nature and thus do not form part of inventory cost.

Examples of these costs include administrative costs, selling and marketing costs, finance costs or borrowing costs (excluding such costs that can be included in the inventory), product research costs, product development costs that failed to fulfill capitalization criteria, abnormal losses etc.

According to CIMA Official Terminology, period cost is:

Cost relating to a time period rather than to the output of products and services

These are called period costs because they are reported in the period in which they are incurred and cannot be carried forward to the next period as opposed to the product costs which are absorbed in the products and are reported in the period in which they are sold.

Another important fact to consider is that how costs are to be classified and treated also depends on the type of accounting being used i.e. financial accounting or cost and management accounting and costing techniques used.
For example under absorption costing all the manufacturing costs whether variable or fixed, direct or indirect are treated as product costs. Whereas under marginal costing technique, only variable manufacturing costs are treated as product costs and fixed production overheads are treated as period costs.

Going bit deeper in costing techniques and cost accounting techniques, we see under Throughput accounting all production costs except direct material costs are treated as period costs like direct labour etc is also treated as period cost. Whereas under Life Cycle costing all the costs incurred right from the beginning i.e. research and development until the product is disposed or consumed are considered as part of the inventory i.e. product cost.

In short, things are simple if they are kept simple for example under financial accounting the distinction between these two is easy thanks to accounting standards. However, under cost and management accounting with new costing and management techniques the classification of different costs is not static or standardised and one cost may be taken as product cost under one costing and management model and the same cost may be taken as period cost in the other model.