Product Costs vs. Period Costs - YouTube

Let's talk about the difference between product  costs and period costs. So a product cost that's  

going to be a manufacturing cost, so those  are your direct materials, direct labor and  

manufacturing overhead. A period cost are the  non-manufacturing costs. So those are selling  

expenses, administrative expenses, any costs  incurred outside of the manufacturing process.  

So if we take a look at this example,  it tells us that Copa Company  

manufactures and sells furniture. We will be given  a list of costs and we will need to classify them  

as either a product cost or a period cost.  So the first one, advertising expenses.  

Again, we said a product cost was anything inside  the manufacturing process. Well advertising that's  

outside, right? So that's going to be a period  cost. Now, wages for assembly line workers.  

Well, assembly line workers they will  be part of the manufacturing process.  

So that's a product cost and that's direct  labor. Now depreciation on the factory building.  

Wo the piece here that's very important is  that it's on the factory itself. Since it's  

on the factory, that makes it a product cost,  and we put that under manufacturing overhead.

Now, wages for sales staff. So we saw  earlier the wages for assembly line workers  

that was direct labor because they are involved  in the manufacturing process. Our sales staff,  

they're not involved in the manufacturing  process, so this is going to be a period cost.  

The next one, glue and nails used in the factory.  So this will be used in the manufacturing process.  

So this is a product cost and it's manufacturing  overhead. Now, wood used to manufacture tables.  

Once again part of the manufacturing  process, so we know it's a product cost,  

but this is going to be direct materials. Now  what makes this different from the glue and nails?  

Well the wood, we can track it to the piece  of furniture that we are manufacturing.

The glue or the nail, think of those as just  smaller pieces used in the manufacturing process  

that aren't being tracked to  a specific piece of furniture.

Now insurance on delivery trucks.  

This is outside of the manufacturing  process, so this will be a period cost.

Depreciation on the office building. So if we  look up at the third one that we worked on,  

that was the depreciation on the factory building,  right? And I said that it was important that it  

was on the factory. Because here we can  see depreciation on the office building  

is going to be a period cost, because it's  not part of the manufacturing process.

Now a factory manager's salary. They're involved  in the factory, in the manufacturing process,  

so it's going to be a product cost. Now, it's  manufacturing overhead and not direct labor,  

because this factory manager is not  directly involved in the manufacturing.  

They're instead overseeing the  manufacturing of the furniture.

And the last one, property taxes on the factory  building. So this will be a product cost, and once  

again manufacturing overhead because the taxes  are on the factory itself. So just as a recap,  

right, we have a factory and anything inside  of that factory will be a product cost.  

Anything outside of the  factory will be a period cost