Product vs Period Costs
Basis: Where the cost was incurred (location/purpose)
| Type | Where Incurred | When Expensed | Balance Sheet Treatment |
|---|---|---|---|
| Product | Manufacturing facility | When product is sold | Flows through inventory |
| Period | Selling, administrative | When incurred | Never touches inventory |
The Location Test
If the cost is incurred in the factory → Product cost
If the cost is incurred anywhere else → Period cost
| Role | Location | Classification |
|---|---|---|
| Factory supervisor | Manufacturing floor | Product (manufacturing overhead) |
| Marketing manager | Corporate office | Period (selling expense) |
| Assembly worker | Factory | Product (direct labor) |
| HR manager | Corporate office | Period (administrative) |
Why Location Determines Classification
A factory supervisor's effort contributes to creating inventory—an asset with future economic value. That cost should attach to the product and become an expense when the value is realized (sale).
A marketing manager's effort doesn't create a storeable asset—it generates sales in the current period. Expense it now.
The Two Costs Can Both Be Indirect
| Manager | Direct/Indirect | Product/Period |
|---|---|---|
| Factory supervisor | Indirect (can't trace to units) | Product (factory location) |
| Marketing manager | Indirect (can't trace to units) | Period (non-factory location) |
Both are indirect. Different columns on product/period axis.
Confusing indirect with period. A cost can be indirect AND a product cost (like manufacturing overhead). The axes are independent.
North: Where this comes from
- Cost Classification Framework (one of three axes)
- Matching Principle (expense recognition should match revenue recognition)
East: What opposes this?
- Direct vs Indirect Costs (traceability axis, not location axis)
South: Where this leads
- Inventory Valuation (product costs flow through inventory)
- Income Statement Structure (period costs hit immediately)
- Cost of Goods Sold (product costs become COGS when sold)
West: What's similar?
- Capitalization vs Expensing (does it create future value or not?)