For accounting purposes, both revenue and cost data are accumulated for a profit center. At the end of the reporting period, all of the production variances are usually closed to the cost of goods sold. When taxes that are levied to finance a subsequent period are collected in the current period, the amount collected should be recorded as unearned revenue. Under the accrual basis of accounting, expenses are recognized when they are incurred. Period cost cannot be considered as the cost of the labor . If you’re using the wrong credit or debit card, it could be costing you serious money.

When products are sold, the product costs become part of costs of goods sold as shown in the income statement. In sum, product costs are inventoried on the balance sheet before being expensed on the income statement. Period costs are just expensed on the income statement. The first expenses listed on a multi-step income statement are cost of goods sold, which is a product cost. They are excluded from the period cost calculation.

What is Product Cost?

Variable cost is $60 per unit. Each paint ball gun requires 1.25 machine hours and 2.00 direct labor hours to produce. Calculate the contribution margin per unit, per machine hour, and per direct labor hour. For a company with one product, describe the equation used to calculate the break-even point or target profit in units, and sales dollars. What is the difference between a variable cost and a fixed cost? Provide examples of each.

When inventory is purchased, it constitutes an asset on the balance sheet (i.e., “inventory”). If it is a product cost, determine if the cost is a direct material or direct labor. If it is neither of these, period costs it should be classified as manufacturing overhead. Indirect labor includes all the other wages and salaries paid to people who work in the production of the product but who are not touch or direct labor.

Month 2: Number of Units Produced Is Greater Than Number of Units Sold

Product costs are any costs incurred in the manufacture of a product. These costs include direct materials, direct labor, and factory overhead. Since product costs reflect a potential future value for the company, they are capitalized.

• When inventory is purchased, it constitutes an asset on the balance sheet (i.e., “inventory”).
• Therefore, direct materials are the materials that are easy to trace to the product.
• Refer to the base case for Snowboard Company presented in the first column of Figure 6.6 «Sensitivity Analysis for Snowboard Company».
• Other companies include fringe benefit costs in overhead if they can be traced to the product only with great difficulty and effort.