You must be able to determine if the cost (money spent for something) is a period or product cost. You also need to determine what category the cost is part of.

1st
You must memorize the 3 types of product costs and 3 types of period costs:
Direct Materials – a material that becomes part of the product
Direct Labor – worker touches the product to make it, or runs machine
Manufacturing Overhead – any cost other than direct material and direct labor that is incurred at the manufacturing facility/plant where the product is made
Selling – costs incurred to get the customer to buy or ship the product to them.
Administrative – costs incurred to support the organization. Words used to indicate an administrative cost are “corporate”, “executive”, “sales”,
Warehouse – costs incurred to store inventories or move inventories internally.

2nd
Ask yourself these questions to determine if it is a product cost or period cost and what classification it fits into:

1. Is it a material that is put into the product and goes to the customer?

If yes, and it is significant enough to track how much is used, it is a product cost, direct material.
If yes, and it is not easy to track than it is a product cost, manufacturing overhead, an indirect material

2. Is this paid to someone who is working directly on the product to make the product or operate the machine that makes the product?

If yes, this is a product cost, direct labor.
If no, and it is paid to people that are working at the plant doing other things – it is a product cost, manufacturing overhead.

3. Is the cost related to the manufacturing facility or incurred to operate the manufacturing facility?

If yes, it is a product cost, manufacturing overhead.
If no, it is a period cost – admin/corporate, selling, research

4. Is the cost related to moving the inventory or storing the inventory,
or shipping the inventory to a customer?

If yes, it is a period cost. This may happen at the manufacturing facility, however, it is not directly necessary to make the product.

5. Are you paying people who work with the customers or paying to ship the product to the customer?

If yes, it is a period cost, a selling cost

6. If you are paying people who are working at the corporate office doing work to support the entire organization?

If yes, it is a period cost, an administrative cost.

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Product and Period Costs – Learn As You Practice Problem

Juffy, Inc. manufactures peanut butter and incurs costs for the following items. Decide if it is a product cost or a period cost. Then, beside the type of cost, write which category the cost falls in. The category will be direct material, direct labor, manufacturing overhead, selling, administrative, or warehouse.

	Product/Period	Category
Plastic Jar	_________________	_________________
Cell Phone for sales people	_________________	_________________
Corn syrup, an ingredient	_________________	_________________
Worker who operates the cooking machine	_________________	_________________
Peanuts, an ingredient	_________________	_________________
Utilities at the manufacturing plant	_________________	_________________
Insurance on the manufacturing plant	_________________	_________________
Janitors wages, at the plant	_________________	_________________
Telephone at corporate headquarters	_________________	_________________
Supervisor at the manufacturing plant	_________________	_________________
Worker who puts the peanuts in the machine	_________________	_________________
Worker who fills the jars with peanut butter	_________________	_________________
Depreciation on the machine that cooks the peanut butter	_________________	_________________
Plant manager	_________________	_________________
Inspector at the manufacturing plant	_________________	_________________
Salesmen travel expenses	_________________	_________________
Oil and parts for the manufacturing machines	_________________	_________________
Lids for the jars	_________________	_________________
Shipping to customers	_________________	_________________
Advertising the peanut butter	_________________	_________________
Rent on corporate headquarters	_________________	_________________
Rent on the manufacturing facility	_________________	_________________