When you hear about ‘cost,’ what comes to your mind? For me, it’s the price we are willing to pay for something. For example, I want to buy a marker for $1.50.
But what is the cost for a business? It is the monetary value paid by a company not to buy something but to produce something, which is finished goods. For example, the economic value used by the Toyota company to make Toyota Crown.
While understanding the cost, we also need to understand the cost object. We want to accumulate expenses for a cost object—for example, Toyota Crown manufactured by Toyota.
Product cost is associated with the cost object, which means any cost used to manufacture the Toyota Crown. It is also called manufacturing and inventoriable cost. The product cost is direct labor, direct material, indirect labor, indirect material, and manufacturing overhead.
Product cost is recorded as inventory and becomes an expense when finished goods are sold. When goods are sold, inventory is reduced in the balance sheet, and the cost of goods sold is increased in the income statement.
What is the period cost, then? The cost incurred while the company is in business is period cost. It is also called a non-manufacturing and non-inventoriable cost. It consists of marketing, selling, and administrative expenses. For example, the cost incurred for marketing of Toyota Crown. It is deducted from revenue while calculating net income.
