9.1 Types of Costs

Product vs. Period Cost

A product cost is any cost related to creating a product and can be a direct or indirect cost.  The key word is CREATING a product.  Product costs are typically direct materials, direct labor and manufacturing overhead.  These costs are not expensed until the product is actually sold, then it is reported as cost of goods sold on the income statement.

A period cost is NOT related to creating the product.  These are costs necessary for the product to be sold or accounted for but not for actually making the product.  A period cost is typically selling, general and administrative costs expensed on the income statement when it is incurred.

Direct vs. Indirect Cost

A direct cost is a cost that can be directly tied or traced to a specific unit, department or process.  Examples of a direct cost include direct materials, direct labor, sales salaries to the sales department, accounting dept salaries to the accounting department, etc.

An indirect cost is a cost that cannot be directly traced to a specific unit, department or process.  Examples include manufacturing overhead, executive staff salaries, and even the Information Technology department salaries to all other departments.

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