Product costs, by their nature attach to the inventory and are recorded in the inventory account. On the other hand, period costs are not considered to be directly related to the acquisition or production of goods and therefore are not considered to be a part of inventories.
Work Step by Step
Product costs are directly connected with the bringing of goods to the place of business of the buyer and converting such goods to a salable condition. They may be costs such as freight charges on purchased goods. However, both product costs and period costs are as much a cost of the product as the initial purchase price and related freight charges attached to the product. While selling expenses are generally considered as more directly related to the cost of goods sold than to the unsold inventory, in most cases, though, the costs, especially administrative expenses, are so unrelated or indirectly related to the immediate production process that any allocation is purely arbitrary.