You are watching: Which of the following statements about product costs is true?
Amy Drury is an investment banking instructor, financial writer, and a teacher of professional qualifications.
Period costsand also productprices are 2 categories of costs for a agency that are incurred in developing and offering their productor business.Below, we define each and also exactly how they differ from one an additional.
Product costs are those straight pertained to the production of a product or business intfinished for sale.Period prices are all other indirect prices that are incurred in production.Overhead and also sales & marketing expenses are common examples of duration costs.
Product costs are the direct costs involved in developing a product. A manufacturer, for example, wouldhave product expenses that include:
Direct laborRaw materialsManufacturing suppliesOverhead that is directly tiedto the production facility such as electricity
For a retailer, the productprices would encompass the supplies purchased from a supplier and any kind of various other prices associated in bringing their goods to sector.In short, any expenses incurred in the process of obtaining or production a product are thought about product costs.
Productcosts are frequently treated as inventory and also are referred to asinventoriable costs bereason these expenses are offered to worth the inventory. When products are sold, the product prices end up being component of expenses of goods offered as presented in the revenue statement.
Period expenses are all costs not had in product prices. Period expenses are not straight tied to the production process. Overhead or sales, general, and bureaucratic (SG&A) costs are taken into consideration period costs. SG&A includesexpenses ofthe corpoprice office, offering, marketing, and the in its entirety management of firm business.
Period costs are not assigned to one specific product or the price of inventory like product costs. Thus, duration costs are provided as an price in the audit duration in which they developed.
Other examples of period costs encompass marketing costs, rent (not directly tied to a productionfacility), office depreciation,and instraight labor. Also, interest expense on a company"s debt would be classified as a duration cost.
Considerations in Production Costs Calculations
Both product expenses and also period prices mat be either resolved or variable in nature.
Production costs are normally component of the variable expenses of organization because the amount invested will certainly differ in propercent to the amount created. However, the expenses of machinery and also operational spaces are most likely to be fixed proportions of this, and also these may well show up under aaddressed costheading or be tape-recorded as depreciation on a separate audit sheet.
The person producing the manufacturing expense calculation, therefore, has to decide whether these prices are currently accounted for or if they must be a component of the all at once calculation of manufacturing costs.
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Also, solved and also variable expenses may be calculated differently at various phases in a business"slife cycleor accounting year. Whether the calculation is forforecasting or reporting affects the correct methodology as well.