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).
A manufacturer's product costs are the
direct materials, direct labor, and manufacturing overhead used in making its products. (Manufacturing overhead is also referred to as factory
overhead, indirect manufacturing costs, and burden.) The product costs of direct materials, direct labor, and manufacturing overhead are
also "inventoriable" costs, since these are the
necessary costs of manufacturing the
products.
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.
b.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.
Period costs are not a necessary part of the
manufacturing process. As a result, period
costs
cannot be assigned to the
products or to the cost of inventory. The period costs are
usually
associated with the
selling function of the business or its general administration. The period
costs are reported as expenses in the accounting period in which they 1) best match with revenues, 2) when they expire, or 3) in the current accounting period. In addition to the selling and general administrative expenses, most interest expense is a period expense.
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.