Product vs Period Costs
Practice As You Learn
Introduction to Accounting
You must be able to determine if the cost (money spent for something) is a period or product cost. You also need to determine what category the cost is part of.
1st
You must memorize the 3 types of product costs and 3 types of period costs:
Direct Materials
– a material that becomes part of the product
Direct Labor
– worker touches the product to make it, or runs machine
Manufacturing Overhead
– any cost other than direct material and direct labor that is incurred at the manufacturing facility/plant where the product is made
Selling
– costs incurred to get the customer to buy or ship the product to them.
Administrative
– costs incurred to support the organization. Words used to indicate an administrative cost are “corporate”, “executive”, “sales”,
Warehouse
– costs incurred to store inventories or move inventories internally.
2nd
Ask yourself these questions to determine if it is a product cost or period
cost and what classification it fits into:
1.Is it a material that is put into the product and goes to the customer?
If yes, and
it is significant enough to track how much is used, it is a product cost,
direct material.
If yes, and it is not easy to track than it is a product cost, manufacturing
overhead, an indirect material
2. Is this paid to someone who is working directly on the
product to make the product or operate the machine that makes the product?
If yes, this is a product cost, direct labor.
If no, and it is paid to people that are working at the plant
doing other things – it is a product cost, manufacturing overhead.
3. Is the cost related to the manufacturing facility or
incurred to operate the manufacturing facility?
If yes, it
is a product cost, manufacturing overhead.
If no, it is a period cost – admin/corporate, selling, research
4. Is the cost related to moving the inventory or storing
the inventory,
or shipping the inventory to a customer?
If yes, it
is a period cost. This may happen at the manufacturing facility, however,
it is not directly necessary to make the product.
5. Are you paying people who work with the customers or
paying to ship the product to the customer?
If yes, it
is a period cost, a selling cost
6. If you are paying people who are working at the corporate
office doing work to support the entire organization?
If yes, it
is a period cost, an administrative cost.
Product and Period Costs – Learn As You Practice Problem
Juffy, Inc. manufactures peanut butter and incurs costs for the following items. Decide if it is a product cost or a period cost. Then, beside the type of cost, write which category the cost falls in. The category will be direct material, direct labor, manufacturing overhead, selling, administrative, or arehouse.
|
Product/Period
|
Category
|
|
| Plastic Jar |
_________________
|
_________________
|
| Cell Phone for sales people |
_________________
|
_________________
|
| Corn syrup, an ingredient |
_________________
|
_________________
|
| Worker who operates the cooking machine |
_________________
|
_________________
|
| Peanuts, an ingredient |
_________________
|
_________________
|
| Utilities at the manufacturing plant |
_________________
|
_________________
|
| Insurance on the manufacturing plant |
_________________
|
_________________
|
| Janitors wages, at the plant |
_________________
|
_________________
|
| Telephone at corporate headquarters |
_________________
|
_________________
|
| Supervisor at the manufacturing plant |
_________________
|
_________________
|
| Worker who puts the peanuts in the machine |
_________________
|
_________________
|
| Worker who fills the jars with peanut butter |
_________________
|
_________________
|
| Depreciation on the machine that cooks the peanut butter |
_________________
|
_________________
|
| Plant manager |
_________________
|
_________________
|
| Inspector at the manufacturing plant |
_________________
|
_________________
|
| Salesmen travel expenses |
_________________
|
_________________
|
| Oil and parts for the manufacturing machines |
_________________
|
_________________
|
| Lids for the jars |
_________________
|
_________________
|
| Shipping to customers |
_________________
|
_________________
|
| Advertising the peanut butter |
_________________
|
_________________
|
| Rent on corporate headquarters |
_________________
|
_________________
|
| Rent on the manufacturing facility |
_________________
|
_________________
|
Answers
Plastic jar –
product – direct material, it becomes part of the product that is provided to the customer, easily tracked
Cell phones for sales people –
period – selling, it is related to selling to customers
Corn Syrup –
product – direct material, it becomes part of the product that is provided to the customer, easily tracked
Worker who operates the cooking machine
– product – direct labor, operates the machine that makes the product
Peanuts – product – direct material, it becomes part of the product that is provided to the customer, easily tracked
Utilities at the manufacturing plant
– product – manufacturing overhead, a cost to operate the manufacturing facility (“at the manufacturing facility or plant” usually means
manufacturing overhead)
Insurance on the manufacturing plant
– product – manufacturing overhead, a cost to operate the manufacturing facility
Janitors wages at the plant
– product – manufacturing overhead – a cost to operate the manufacturing facility
Telephone at corporate headquarters
– period – administrative, it is not related to making the product – corporate usually means administrative expense
Supervisor at the manufacturing plant
– product – manufacturing overhead, a cost to operate the manufacturing facility
Worker who puts the peanuts in the machine
– product – direct labor, directly touches the materials in the product in order to make the product
Worker who fills the jars with peanut butter
– product – direct labor, directly touches the materials in the product in order to make the product
Depreciation on the machine that cooks the peanut butter
– product – manufacturing overhead, a cost to operate the manufacturing facility that is not direct material or labor
Plant manager
– product – manufacturing overhead – a cost to operate the manufacturing facility that is not direct material or direct labor
Inspector at the manufacturing plant
– product – manufacturing overhead, – a cost to make the product that is not direct material or direct labor
Salesmen travel expenses
– period – selling, it is related to selling the product
Oil and parts for the manufacturing machines
– product – manufacturing overhead – a cost to make the product that is not direct material or direct labor
Lids for the jars
– product – direct material, it becomes part of the product that is provided to the customer, easily tracked
Shipping to customers
– period – selling, it is related to selling the product
Advertising the peanut butter
– period – selling, it is related to selling the product
Rent on corporate headquarters
– period – administrative, it is related to organization activities
Rent on the manufacturing facility
– product – manufacturing overhead – a cost to make the product that is not direct material or direct labor