Product versus Period Costs
The importance of correct product costs can’t be overstated (for businesses that sell products, of course). Some costs are linked to particular products, and others are not:
Product costs: Costs attached directly or allocated to particular products. The cost is recorded in the inventory asset account and stays in that asset account until the product is sold, at which time the cost goes into the cost of goods sold expense account.
For example, the cost of a new Ford Taurus sitting on a car dealer’s showroom floor is a product cost. The dealer keeps the cost in the inventory asset account until you buy the car, at which point the dealer charges the cost to the cost of goods sold expense.
Period costs: Costs that are not attached to particular products. These costs do not spend time in the “waiting room” of inventory. Period costs are recorded as expenses immediately; unlike product costs, period costs don’t pass through the inventory account first. Advertising costs, for example, are accounted for as period costs and recorded immediately in an expense account. Also, research and development costs are treated as period costs (with some exceptions).
Separating product costs and period costs is particularly important for manufacturing businesses.