Cost Concepts And Classification : Difference between Product & Period Costs

July 18th, 2006 /

Product costs:

Those costs that are identified with goods purchased or produced for resale. In manufacturing firm, these costs are attached to the product and included in stock valuation for finished goods or work-in-progress, until they are sold.

Period costs:

Those costs that are identified with a SPECIFIC TIME INTERVAL and not inventoried. They are charged to the period as another form of matching expenses with revenue.

Salient Point:

In a manufacturing concern, all manufacturing costs are regarded as product costs and non-manufacturing costs as period costs.

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Stha
1. Why would reclassifying period costs as product costs increase this period’s reported earnings?
2. Is it ethical? Why or why not?
BM
Reclassifying period costs to product costs has the effect of diverting costs that should have been expensed to the p&l as incurred, and adding them to the current inventory.

Stated another way, Because some of the period costs are being ‘put’ into the inventory and not with the cost of goods sold. In effect, for a given level of sales, the non-product costs (SG&A) are not expensed as incurred, rather they are added to inventory. Which in effect increases net income.
slang
Good answer BM!.
Based on good accounting principles,in terms of matching concept,it is not right to MANIPULATE in this manner. By doing so, stakeholders and other public investors who are interested to buy the business,etc will be mislead.Incidentally, if you refer to the types and causes of fraud ( refer to my other blog:ieauditblog.com), many tend to manipulate the stock/inventories for their own selfish reasons. Ethical or not, you can now guess!