Product Cost

These are costs directly and indirectly identifiable with the product. They are direct materials, direct labor, and factory overhead. These costs provide no benefit until the product is sold and are, therefore, inventoried upon completion of the product. When the products are sold, the total product costs are recorded as an expense, called the cost of goods sold. Cost of goods sold is matched against revenue for the period in which the products are sold.

Period Costs

Those costs neither directly nor indirectly related to the product are not inventoried. Period costs are charged off immediately because no relationship between cost and revenue can be determined. The following are examples period costs (administrative expense), and interest incurred on corporate bonds (financing expense).