Posted: April 7th, 2016

What are the differences between product and period costs?

Your company, a medium-sized manufacturer of widgets, has just held the annual end of year “State of the Business” meeting for all employees. The president discussed how well the company has been doing, focusing on presenting the Income Statement for the last year. During the meeting, he used terms like product costs, and period costs, and how each affects the company’s profits. He also announced that going forward, instead of manufacturing just one standard type of widgets, there will be a new department added that will make custom versions of the firm’s normal product line.

At the end of the meeting, he asks each supervisor to prepare a memo to his or her own employees, describing in layman’s terms the following concepts:

1. What are the differences between product and period costs?
2. Why is it important to properly distinguish one type of cost from the other?
3. Where on the firm’s income statement will period costs usually show up?
4. Where on the firm’s income statement would product costs end up?
5. The new department will make use of a job order costing system. How and why will this differ from the current process costing system used elsewhere in the plant?

Provide 2 examples of companies that would use:
1. Job order costing
2. Process costing

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