Product Costs versus Period Costs — Practice Questions

By Kenneth Boyd, Kate Mooney

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

  1. 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?

  2. 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

  1. 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.

  2. $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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