Is ‘Cost of goods sold’ a Product cost or a Period cost?

Before we discuss under what heading should we classify cost of goods sold, let’s first of all clear out our minds for the terms inventoriable costs and period costs with a quick review. You can the answer on difference between period costs and product costs in good detail here.

I will be using the word Inventoriable cost for Product cost as it makes even more easier to remember the fact that costs that form part of inventory value are called inentoriable costs — an alternative term for product cost

Inventoriable costs (Product cost) or Product costs are all such costs that form part of the inventory.These are basically such costs that relates directly to the products such as 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.

Period costs or non-inventoriable 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.

Let’s come back to the question in hand.

Cost of goods sold on the other hand is the product cost of goods sold in a particular accounting period or simply sum of inventoriable costs that has been expensed out in a specific accounting period.

Now this is a bit tricky as some would say that before being cost of goods sold these were product costs so that is why it is product cost and some would say that as in the end cost of goods sold is charged in relation to a period therefore it is a period cost.

Cost of goods sold is both inventoriable cost and period cost where product cost ended up being period cost also. As firstly it was a product cost but as products are sold and with revenue recognized we have to record matching costs as well for the period i.e product cost. Therefore, cost of goods sold is now a period cost as well. It just depends on us whether we want to ignore or forget what cost of goods WAS before the goods were sold.

But some would suggest that it WAS an inventoriable cost and after products are sold NOW it is a period cost and the product cost of unsold units of product is actually the product cost. In other words follower of this school of thought suggest that inventory cost of units sold out is period cost where as inventory cost of units unsold is product cost as inventory costs of unit sold is reported in the Income Statement which relates to the period and inventory cost of units unsold is reported in the Statement of Financial Position (Balance Sheet) in which units are carried forward to the next accounting period. And this does make sense as what cost of goods sold “was” is irrelevant at the time goods are sold and we should be concentrating what cost of goods sold “is” at the time of reporting – which is period cost.

As I said, it just depends on the perspective that we are using to classify cost of goods sold either as product cost or period cost.


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