What is the treatment of costs?

Treatment of costs refers to the linkage of a cost to a product or service. These are classified as product or period costs.

Product Costs

Product costs are any costs linked to the manufacture of a product or a service. Anything directly related to the production of a good or delivery of a service is a product cost.

The formula of Product Cost = Direct Materials + Direct Labour + Factory Overhead (Indirect Materials + Indirect Labour).

Examples of product costs include:

• Cotton in a clothing production

• Glue used in shoe production

• Factory worker wages in a cannery

Period Costs

Period costs are any costs that are not linked to the manufacture of a product or a service. Do not get these confused with indirect costs, indirect costs can also be linked to the manufacture of a product. Period costs are costs that have no obvious relationship to a production of a good or delivery of a service.

Some period costs can include:

• Rent

• Interest on loans

• Insurance

• Legal costs