 Hello and welcome to the session in which we will discuss product cost. This topic is important whether you are taking managerial accounting, cost accounting or the CPA exam BEC section or the CMA exam. It's very important that you understand what is product cost and it's important to understand product cost in the context of period cost. Now, whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website farhatlectures.com. If you're studying for your CPA exam, I don't replace your CPA review course. I am a useful addition. I'm a supplemental material to your CPA review course. I explained the material a little bit more in depth, slower and differently than your CPA course. It might be a useful addition to your CPA review course. So I help you understand your CPA review course, which in turn will help you pass the CPA exam. Your risk is one month of subscription. Your gain is passing the CPA exam. And if not for anything, take a look at my website to find out how well your university doing on the CPA exam. Now, on my website, I do have a list of other courses, intermediate accounting, auditing, managerial accounting, as well as other courses, including CPA review courses that matches your CPA review course that you are taking. I do have the AICPA previous released questions as well. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation. Like this recording, share it with other, connect with me on Instagram, YouTube, Twitter and Reddit. So let's go ahead and talk about period cost and product cost. Let's first talk about the product cost. What is a product cost? Think about the word the product. It's a cost that are involved, any cost that's involved in acquiring or making a product. Now acquiring, it's easy to understand. If you purchased an item, if you are in retail, let's assume you sell pants, you buy a piece of pants. It's easy to keep track of it. You paid for it $15. That's the cost that's acquiring that pants. Let's assume you are manufacturing a vehicle. Well, you have to keep track of making the product. So any cost that's involved in making that vehicle and making that vehicle, it's gonna be considered. Okay, I'll change it to blue. No, can I pick? Quick. Green. Okay, thank you. Thank you. Okay, so any cost that's involved in making the product is considered a product cost. And you have to know that product costs are inventoriable costs. In other words, once you make the product, the product sits on the shelves or sits in your warehouse, it's considered inventory. Just like when you purchased those pants, they are part of your inventory. When you make a product, that's part of your inventory. Simply put, product cost is an asset. It is an asset, obviously, until it is actually sold. So any cost you incur, you attach it to the unit of product that you are producing. Let's assume you are producing the car. And as long as that car sits in your warehouse or at the dealership awaiting sale, it's considered inventory. And what happened when you actually sell that car, sell that finished goods? Well, it's converted into cost of goods sold. And here's a picture of what we are discussing here. So you have an inventory vehicle, you manufacture it, it costs you $50,000, and you sold it for $80,000. So what's gonna happen, once you sold it, you're gonna remove it from inventory and $50,000 becomes cost of goods sold. The $80,000 is the sales amount. You sold it for $80,000, but the cost is $50,000. So notice what happened to it. The manufacturing costs end up in inventory. And we're gonna see on the next slide, how does it end up in inventory? What goes into that product cost? But this is a picture of it. On the other hand, period costs are different. Period costs are selling costs and administrative costs. So what do we do with these costs when the company incur these costs? When we incur these costs, we don't consider them an asset, we consider them an expense. Simply put, we expense them on the income statement. So it's very clean, easy and clean. We don't have to carry them because we assume they don't provide any future benefit and we cannot associate them with any particular future benefit. Therefore, we expense them. So it's easy. Period costs are easy because every year you close your expenses, they go down to zero. Therefore, when you think about period costs, think about expense. They go on the income statement, case is closed. Now we need to focus a little bit more about what constitute product cost. So we're gonna be looking for a manufacturing company. For any particular manufacturer company, usually it involved three categories, raw material, work and process and finished goods. You have to be familiar as a managerial accounting, cost accounting, CPA or CMA candidate with those three terms. So what is raw material? Raw material is any material that goes into the final product, any material. If you're manufacturing a car, everything that you see, you can visually see in that car is considered raw material initially. If we're talking about a car with Tesla, the tires, the computer system, the autopilot system, the batteries, all of these are considered raw material as well as any other material. So when we use direct material or material, when we use material in production or which is like a tire is a direct material, the cost of that tire is transferred from raw material to work and process. So simply put, we're gonna incur material here. Once that material is starting to make the product, once we start to put the car together, it becomes work in process. So direct labor, manufacturing overhead costs are also added to work and process. So any direct labor, the cost of people who are working on that car in any manufacturing overhead, and we talked about manufacturing overhead in the prior session, manufacturing overhead is any manufacturing cost other than direct material, other than DM and DL is manufacturing overhead. All of these costs are added to account called work and process to convert them into actually finished goods. So before we convert something into finished goods, it goes into a conversion process. That conversion process is called work and process or work in progress. What are work and process? Those are units that are partially completed. They're not completed 100%. If they are completed, we would call them finished goods and they will require further work before they are ready to be sold to the customer. For example, no one will buy this Tesla car because it's not complete. There's no tires on it. I don't see the batteries in the back. I don't see lights. I don't see windows or anything. So this is a work and process. What does that mean? It means it's not fully finished vehicle. That's how we call it work and process. What's gonna happen once it's completed? Well, once it's completed, all the costs that we incur on that unit in work and process is transferred to, guess what? Finished goods, finished goods. So what is finished goods? It's completed 100%. The car is ready to be sold. It's a completed unit that have not yet been sold. So simply put, it's waiting in the store or in the warehouse. It would look something like this. This is the car that we were manufacturing. This is, it's ready to be sold. It's sitting in the warehouse. When a manufacturer sell its finished goods, all the costs are transferred to cost of goods sold. Do you remember what I showed you earlier? I told you we have 50,000 in inventory and I told you I'm gonna show you how we came up with this 50,000 and once we sell this car, it goes from inventory to cost of goods sold. What is that 50,000? That 50,000 consists of raw material which is direct labor, direct material, manufacturing, overhead, work and process. All the cost was transferred from raw material once it's done to inventory, to finished goods. And when we say finished goods, the same thing as inventory or finished goods inventory. Now, this is a balance sheet for a typical manufacturing company. So notice inventories consist of three accounts, raw material because you'll have raw material in your warehouse ready to be manufactured, units that are partially completed work and process and finished goods. For a typical retailer or for a typical company that's not manufacturer, we only have one account and usually it's called inventory. One account inventory. For a manufacturing company, you'll have three accounts. Now, if you look at a balance sheet of an actual manufacturing company, for example, if you look at the balance sheet for Tesla, I should have did that, but it's okay. Or for the motor company, you will see for example, they only show you the inventory amount like two billion or whatever. Now, what's gonna happen, they're gonna tell you C note five or C note eight or C note nine. It doesn't matter what the note is. You go to that note and under that note, it will break down the inventory into those figures. So they may not show you those figures at the face of the balance sheet, but they're gonna tell you inventories, the total number, C note, whatever that note is. So this is how it's posted. This is how it's shown on the balance sheet. Let's take a look at this question, which is again, this question as well as other questions if you are a managerial accounting students. On my website, you'll have these questions to help you practice, to help you practice. Each of the following would be a period cost except. So be careful about except. So, they're all period cost except one. Let's start with D, okay D. Insurance on a company showroom where customers can view new product. So do you think that's a period cost or do you think that's a product cost? Let's see. Insurance on a company showroom where customers can view their new product. Let's think about Tesla and let's think if you live in the Pennsylvania King of Prussia, we do believe Tesla, they have a showroom at the King of Prussia mall. So if you go in there and they're paying insurance in that showroom, do you think that insurance is a period cost or a product cost? Well, I would say it's a period cost. Why? Because the manufacturing process is done. Remember, product cost is a cost that goes into the product itself. Well, now you are showing the car in the showroom. The production is finished. So this is a period cost rather than a product cost. It's basically a selling cost because it's showroom is a selling cost. The cost of a general accounting office, well, is general accounting producing the vehicle or is it part of the general overall support? I would say accounting support the whole company. Not only manufacturing, therefore it's a period cost. So we're down to 50-50. The salary of the company's president secretary, do you think that's a period cost or that's a product cost? Do you think the salary of the secretary is part of the production process? I would say no, that's a period cost. Let's look at A. By process of elimination, A must be the right answer, but let's take a look at A. Depreciation, and be careful here, of the factory maintenance equipment. So notice here what makes it really a product cost is the fact that it's the depreciation on the factory maintenance equipment. Now, why am I emphasizing this point? Because this could be depreciation on the headquarter. Guess what? That will not be the product cost. That will be a period cost. Why? Because the headquarter houses the CEO, the CFO, the HR accounting and those are period costs. But here we're talking about depreciation of the factory or it could be depreciation of the sales people building where we house our sales people. They occupy a building and we book depreciation on that building. That's not product cost because it has nothing to do with manufacturing. It has nothing to do with the factory. So remember product cost has to do with manufacturing the product itself. So depreciation is an overhead cost that is related to product cost. Again, this questions and other questions can be found on my website for additional practice. At the end of this recording, I'm gonna remind you especially if you're a CPA candidate, take a look at my material. It's take the risk, it's worth it. You're investing for 20, 30, 40 years in your career. The CPA is a long-term investment. You really wanna throw everything on it. And remember, I do have resources for other accounting courses as well. And my CPA review courses goes hand in hand with your CPA review. Good luck, study hard and of course, stay safe.