Cost is the payment or promises to pay in future concerning cash to generate revenue (Warren, Duchac & Reeve, 2013). Two different types of costs are important in a business; product and period costs. Product costs are associated with the manufacturing of a merchandise and includes; direct materials, direct labor, and manufacturing overhead. On the other hand, period costs are easily associated with expenses since they result from selling operations.
In management, it makes sense to separate the product cost from period cost. The reason for this is that the period cost is an expense, while on the other hand the product cost is the actual amount used in manufacturing ("Product costs and period costs - explanation and examples | Accounting for Management", 2017). Product cost assist in making future decisions about the operations of the business. For managerial purposes, I believe it makes sense to separate product cost and product cost. The reason for the separation of this value is to ensure that the management can account and deal with all the expected expenses in the future including the period cost (Van der Stede, 2015).
For external accounting purposes, the period cost and product cost have to be accounted for differently since one is a cost of production and the other is an expense (Chiarini & Vagnoni, 2014). Expenses cannot be included in the cost of production, thus if the external accounting combines this two costs, then the business can suffer by and try to adjust their selling price to cater for the increased cost of production. The separation of the two costs also assists the management and external reviewers to identify the actual cost of production.
Any reporting, be it managerial or external accounting must account for period and product cost differently ("Why is it Wise to Separate Product Costs from Period Costs", 2017). The reason for accounting for these two costs differently is that the product cost can be used by external sponsor such as the government to subsidies production. On the other hand, the period cost can assist the business to improve the mode of operation and reduce the expenses associated with sales.
Chiarini, A., & Vagnoni, E. (2014). World-class manufacturing by Fiat. Comparison with Toyota Production System from a Strategic Management, Management Accounting, Operations Management and Performance Measurement dimension. International Journal Of Production Research, 53(2), 590-606. http://dx.doi.org/10.1080/00207543.2014.958596
Van der Stede, W. (2015). Management Accounting: Where From, Where Now, Where To?. Journal Of Management Accounting Research, 27(1), 171-176. http://dx.doi.org/10.2308/jmar-51059
Warren, C., Duchac, J., & Reeve, J. (2013). Managerial accounting. Cengage Learning.
Why is it Wise to Separate Product Costs from Period Costs. (2017). iBrand Your Business Blog. Retrieved 20 September 2017, from http://ibrandyourbusiness.com/blog/why-is-it-wise-to-separate-product-costs-from-period-costs/("Product costs and period costs - explanation and examples | Accounting for Management", 2017)
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