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Cost Accounting

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Cost Accounting

You will describe costs which are included in inventory (product costs) and describes costs classified as period costs.

Product Costs

Product costs can be defined as manufacturing cost that is related to inventory. They are recorded in the inventory as an asset or addition to stock once the cost is incurred during purchase. After selling, the product costs are recorded as the cost of goods, leading to a stock reduction in quantity and value (Magdalina, 2017). On the other hand, it increases the value of revenue.

The product cost is categorized into four; direct labor, direct materials, manufacturing overheads, and direct expenses (Cost Concepts and Behavior, 2011). The direct costs can be traced to a certain product at a reasonable cost. Direct materials are used in the production of a product and have a certain value. Direct labor is used for production, as raw materials are transformed into the finished product. Manufacturing overheads are indirect costs as they are untraceable to the product in a reasonable manner. Other costs that are incurred, excluding direct labor and materials, fall within the overheads category. Direct materials, expenses, and labor are prime costs, while the overheads are conversion costs. Conversion costs are critical to the conversion of materials into accrual products. Direct labor falls into both categories.

Product costs have an impact on the business’s income. Since product costs are associated with the actual process of production, they are included in the production costs. The product costs affect the inventory value initially. Upon sale, the product is recorded in the income statement influencing the businesses’ revenue positively. This implies that until its sale, a product cost cannot affect the income statement. Product costs take various forms, including drugs in a chemist, groceries for sale in a supermarket or grocery store, clothes for sale in a boutique, and cement and other raw materials for the production of building materials, which must be processed before the sale.

Period Costs

Period costs can be defined as non-manufacturing costs that are related to a firm. They are considered expenses since they are not part of the stock valuation process. They are recorded during the financial period that they are incurred. This implies that carrying them forward to a new accounting period is impossible. This practice is guided by the independence rule of accounting, which states “only events occurred in a given period should be posted in the corresponding accounting period” (Magdalina, 2017, p. 315). A different definition states that “period costs are all costs in the income statement other than the cost of goods sold” (Magdalina, 2017, p. 316). Their deduction from revenues occurs without prior inclusion in the inventory. The administrative, advertising, selling, and general expenses are recorded in a business’s income statement.

For instance, a large organization such as Apple includes its Research & Development as period costs. However, this cost may benefit the resulting products in a future period. Just like product costs, period costs can be direct or indirect. Common non-manufacturing costs include advertising, marketing, shipping, and sales commissions. The administrative costs included in the period costs include legal costs, data processing, and executive staff salaries. The period costs are deducted from the gross margin in the income statement. This deduction provides the net operating income. As the name suggests, they are stated during their incurred period. They do not appear in the following financial period’s income statement.

Period costs consume from the company’s revenue but are important for continuous and successful operation. For instance, an organization cannot operate without managers. The organization cannot sell products without marketing. It is impossible to develop new products without research and development. They cannot be directly associated with specific products despite their importance to production. However, their value can be generated back when product costs are sold or converted into revenue.

References

(2011). Cost Concepts and Behavior. The McGraw-Hill Companies, Inc. Retrieved from https://www.csus.edu/indiv/p/pforsichh/documents/ACCY121MidtermExamStudyGuidePPTSlidesonchs2_3_4_5_7_8.pdf

Magdalina, A. (2017). Period Cost and its Impact on Financial Statements. Review of International Comparative Management, 18(3), 315-325.

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Question 

AC420 Cost Accounting | Unit 1 Assignment

GEL-1.02: Demonstrate college-level communication through the composition of original materials in Standard English.

Cost Accounting

Assignment Details:

Companies accumulate costs based on the distinction between costs for their product or service and other operating costs. This assignment will help you to further understand of the classifications of costs and types of costs assigned to a product or service. This concept is important because net income must be properly measured and inventory must be properly reported on the balance sheet.

Based on the Chapter 2 Reading, discuss the following cost accounting concepts:

Assignment Requirements:

  1. You will describe costs which are included in inventory (product costs) and describes costs classified as period costs.
    1. Examples of each cost type are included.
  2. You will explain where product costs and period costs are found in the income statement.

Assignment Checklist:

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