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 – 
productdirect 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
productdirect 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

Peanutsproductdirect 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
productmanufacturing 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
productmanufacturing overhead, a cost to operate the manufacturing facility that is not direct material or labor

Plant manager
productmanufacturing 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