 Hello and welcome to this session in which we'll discuss product cost versus period cost. This concept is important because every time a company incur a cost the company will have to decide whether that cost is expensed or whether that cost is treated as an asset and when we treat it as an asset the term for it is called capitalized. So we have to determine whether we capitalized an expenditure, we capitalized a cost or we treated as an asset. When we capitalized a cost we say this is product cost. So product cost is basically when we treat an expenditure as an asset and when we incur a cost that's not treated as an asset. Now what is something treated as an asset? We treat something as an asset when we believe it's going to provide future benefit. This is the term. Well if it doesn't provide future benefit or we cannot measure that future benefit we expense it and period cost is something that we are going to expense. So this concept expenses versus capital capitalizing is an important concept in accounting. Sometimes expensing called revenue expenditure, revenue expenditure. Sometimes they call it revenue expenditure to indicate that it's an expense it's not an asset. So this concept is important by itself. In this session we're going to be illustrating this concept by determining what do we consider it a product cost, what do we consider it a period cost. So whether you are an accounting student or a CPA candidate I strongly suggest you take a look at my website farhatlectures.com. I don't replace your CPA review course. I'm a useful addition. I can help you add points 10 to 15 points to your CPA exam course. How? I can help you understand the material better. I go a little bit more in-depth than your CPA review course. I don't assume any prior knowledge and this is how I can help you understand your CPA review course better which in turn help you do better on your CPA exam. 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So let's start to talk about the product cost a little bit more in detail. Product cost are inventoriable cost. In other words once we once we say this cost is a product cost it means it's part of your inventory. In other words it's an asset it gets attached to the asset. Now what happened to this asset? Eventually this asset we're gonna sell this asset we're not gonna keep it forever we're gonna sell it. Once we sell it it becomes cost of goods sold which means it becomes an expense. So all assets eventually get expensed but in due time. So what can what do we consider the product cost? Well cost to bring in the asset to a saleable condition it's gonna be considered a product cost. Like what? Like purchasing the asset you purchase something from Amazon for 100 dollars. Well that's part of your cost. You paid five dollar in shipping that's five dollars it gets added to your cost. Let's assume you paid six percent taxes that's six dollars that's 111. Let's assume you need special packaging for this product and you ask the shipper to package it in a in a special way in a different package. Well that's another 10 dollars. So you end up paying 121 dollars for this product. So this is your cost this is the cost of your inventory. Well if this is your cost it's considered an asset. Assuming you're selling this inventory you're in the business of buying and selling but the cost would include the purchase, the shipping, the taxes, any processing. For a manufacturing company their business is different. Manufacturing companies what they do they buy raw material they hire labor they put that product together then they sell it. Well for manufacturing companies what's considered a product cost? Direct labor. Direct labor we call it touch labor. It's when the labor when the person working on the product touches the product itself working on it directly. Well if that's the case any payroll cost it gets treated as an asset it gets treated as part of the product. Direct material. What's direct material? The raw material that we feed into the product. For example if we're manufacturing a car the tires the radio the seats those are direct material those gets treated as an asset because they're part of the vehicle part of the asset. The third category is called manufacturing overhead and manufacturing overhead is any cost we incur in the production process other than direct material and direct labor and this is a list of all other costs that we incur that has nothing to do with labor and material direct labor and direct material rent depreciation taxes payroll oh hold on didn't I say payroll is direct labor well you could have payroll as direct labor you could also have payroll as indirect labor well guess what those people who are working on the line to manufacture the car they need a supervisor the supervisor is not touching the product supervising the process it's indirect material you need a janitor in that facility you need security guard those are all payroll expenses payroll cost and what we do with those payroll costs because they are part of the production process we're going to treat them as product cost so any cost that helps you produce the product inside the manufacturing facility within that manufacturing facility umbrella it's considered production cost which is if it's a production it's a product cost so this is what product cost are so period cost then it's cost that has nothing to do with the production it's not directly related to the production or acquisition so cost that we incur that it's not part of the production process it's not part of our purchasing the product or not directly related could be indirectly but not directly what do we do with these costs well we expense them and usually those costs are considered administrative and selling expenses what are let's start with selling expenses so they they're basically broken down under two categories most of the time selling expenses cost incur to sell the product like what like freight out hold on this sounds like freight in so notice we have a freight in and we have freight out freight in was transportation to buy the product freight out let's assume once you sell it you're gonna ship it on your own expense you tell the customer look just buy the product the shipping is on me and you have to pay three dollars per unit shipping well this three dollars is is a shipping cost shipping cost or freight out shipping cost is an expense you already purchased the product or you already manufactured the product so the cost for the product already done now you are incurring an operating cost to actually sell it so freight out is an expense advertisement advertisement is an expense because we cannot measure the future benefit of advertisement it doesn't fit the definition of an asset we can't measure that salaries to sales team well we're going to be paying salaries hold on a second we have salaries to sales team and said we're going to expense this as a selling expense we have salaries that we pay to the janitor to the supervisor it's called indirect labor and we have salaries that we pay to the direct labor people that touch the product so notice when you pay the employees you have to determine what type of salaries or payroll is this is this for direct labor is this for indirect labor both of these are product costs or is this for selling expenses you could also have rent we'll hold on a second we also have rent under product cost again the same concept you are renting something you are renting a machinery for what purpose is it for the production process the rent is product cost if it's not it's a period cost the same concept for depreciation we could have depreciation as a period cost we could have a depreciation as a product cost it all depends on what are we depreciating well let's assume we're depreciating a copier well where is that copier located where is it helping is it located in the production process if it's located in the production process helping the manufacturing facility produce the product then it's a product cost if that copier is part of the sales team part of helping them make sales then it's a period cost so it all depends administrative cost is cost related to the company's operation as a whole like what like the salary of the ceo the salary of the cfo well hold on also we here have payroll well it depend whatever payroll well this payroll has to do with the company overall not not related to selling not related to the product directly well nevertheless although it's not related to selling it's an expense because it's considered administrative administrative cost are expense hr salaries payroll salaries people that handle our payroll all these are administrative expenses also administrative expenses might have rent they might have depreciation okay they might also have a copier in that building where the ceo is located and that copier is depreciated but it's considered now administrative cost not selling and not product cost interest cost you need to know that interest cost is a form of financing interest cost is expense so interest cost incurred for repetitive inventory production okay and the reason i'm saying here repetitive inventory production because when we talk about product versus period we're talking about inventory is the cost inventoryable or is the cost expense interest cost so if you borrow money to produce to mass produce something it's a finance cost finance cost is considered a period cost a period cost is expense unless the interest is to manufacture an asset for internal use let's assume you are building your own equipment then then that's a different story or the asset if you are building the asset is a discrete project for sale or lease or someone asks you to build a ship or a plane or a missile or a house and you are spending this money on the manufacturing process and you are incurring interest the interest that you incur under those circumstances is considered a product cost and this is the topic for a different this is the this is a topic for a different recording okay basically we have to look at capitalized interest so in a nutshell in a nutshell you need to know the difference between your product cost and period cost it's very important for your understanding of the accounting as well as cpa at the end of this recording i'm gonna invite you again to take a look at my website farhatlectures.com whether you are an accounting student or a cpa candidate it will help you understand the material better and i don't replace your cpa review course you keep it i'm a useful addition your your risk is one month of subscription give it a try take a chance you like it you keep it you don't like it you cancel that's it that's your risk but your potential gain is adding points to your exam adding knowledge adding adding resource that's going to help you put the cpa behind you and focus on your career the cpa is a long-term plan long-term investments invest in yourself once you pass it you're done you don't have to do it anymore good luck study hard and of course stay safe