In a manufacturing organization, a distinction is made Between product costs and period costs.
Product costs (also known as inventoriable costs) are costs assigned to products. These costs are identified as being either direct materials, direct labor or factory overheads and are traceable or assignable to products. They become an expense only when the products to which they are attached are sold.
Product costs are related to manufacturing activities and include the following costs: raw materials used, depreciation on plant, expired insurance on plant, production supervisor’s salaries, manufacturing supplies used, plant maintenance and so on.
Period costs are expired non-product costs and they are identified with measured time intervals and not with goods or services. They are any cost or an expense item of the income statement. Examples include selling and administrative costs since selling and administrative expenses are used up in the same period which they originate. Period costs are related to services consumed during the current period.