Product costs are included in the cost of a product. These costs become expenses when the product is sold. Period costs, on the other hand, are expensed immediately when they're incurred.
In the following practice questions, you're asked to separate period costs from product costs for one company, and then to tally up product costs for another.
Practice questions
Happy Birds Wild Bird Feeders records depreciation on delivery trucks and pays for the following items:
Wood to construct the feeders
Nails and glue used in construction of the feeders
Skilled workers to construct the feeders
A supervisor for the factory
Utilities for the factory
Sales commissions
Insurance on the factory
Property taxes on the factory
Which of the items recorded or paid is a period cost?
Cloud Glasses Company sells glasses that protect the wearer from supposedly dangerous ultra-blue rays emitted by clouds. The company has the following information:
Indirect materials used in products: $6,400
Depreciation on delivery equipment: $10,200
Gas and oil for delivery trucks: $2,200
President's salary: $92,000
Materials used in products: $120,000
Labor costs of assembly line workers: $110,000
Factory supplies used: $24,000
Advertising expense: $25,000
Property taxes on the factory: $45,000
Repairs on office equipment: $1,800
Factory utilities: $39,000
Determine the total amount of product costs.
Answers and explanations
Depreciation on delivery trucks and sales commissions.
Period costs are expensed in the period incurred and not matched with product revenue. Selling and administrative expenses are period costs.
$344,400
Product costs are all manufacturing costs used to make the product and fall into the broad categories of direct materials, direct labor, variable overhead, and fixed overhead. The indirect materials used in the product are a variable overhead cost. The other product costs are materials used in products, labor costs of assembly line workers, factory supplies used, property taxes on the factory, and factory utilities.
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