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Fixed Overhead
Fixed Overhead
Fixed overhead is a set of costs that do not vary as a result of changes in activity. These costs
are needed in order to operate a business. Since fixed overhead costs do not change
substantially, they are easy to predict, and so should rarely vary from the budgeted
amount. These costs also rarely vary from period to period, unless a change is caused by
a contractual modification that alters the cost. Examples of fixed overhead costs that can
be found throughout a business are rent, insurance, office expenses, administrative
salaries, depreciation, and amortization.
Product cost refers to the costs incurred to create a product. These costs include direct
labor, direct materials, consumable production supplies, and factory overhead. Product
cost can also be considered the cost of the labor required to deliver a service to a
customer. In the latter case, product cost should include all costs related to a service,
such as compensation, payroll taxes, and employee benefits.
Product cost can be recorded as an inventory asset if the product has not yet been sold. It
is charged to the cost of goods sold as soon as the product is sold, and appears as an
expense on the income statement.
they are expense in the period incurred and appear on the income statement. Period costs are
also called period expenses.
In managerial and cost accounting, period costs refer to costs that are not tied to or related to
the production of inventory. Examples include selling, general and administrative (SG&A)
expenses, marketing expenses, CEO salary, and rent expense relating to a corporate office.
The costs are not related to the production of inventory and are therefore expensed in the
period incurred. In short, all costs that are not involved in the production of a product
(product costs) are period costs.
Definition: Costs related to the production of a product Costs not related to the production o
product
Method of Capitalized on the balance sheet as inventory and Expensed on the income statement
Recording: eventually expensed to cost of goods sold on the period incurred
income statement
Examples: Direct labor, direct materials, and manufacturing Marketing expense, selling, general
overhead administrative expense, and CEO sa
All costs incurred by a company are either period costs or product costs. Additionally, the two
types of costs are recorded differently. See the table below for more comparison:
To quickly identify if a cost is a period cost or product cost, ask the question, “Is the cost
directly or indirectly related to the production of products?” If the answer is no, then the cost
is a period cost.