How does the timing of expense recognition differ between product and period costs?

Answer 1

This is related to the matching principle. In accounting, the matching principle indicates that when it is reasonable to do so, expenses should be matched with revenues. When expenses are matched with revenues, they are not recognized until the associated revenue is also recognized. For instance, wages paid to manufacturing workers are not recognized as expenses until the actual products are sold. Until then they are capitalised into inventory costs. When the products are sold, the expenses are recognized as cost of goods sold. Only if no connection with revenue can be established, cost can be charged as expenses to the current period (e.g. office salaries and other administrative expenses). This principle allows greater evaluation of actual profitability and performance (shows how much was spent to earn revenue). Depreciation is another example of the matching principle: The cost of purchasing a fixed asset is spread over the period in which it is expected to generate revenue.

Product costs are costs which add value to inventory. These costs are capitalized (added) to inventory, and later expensed as cost of goods sold when the goods are sold.

Period costs are costs which are expensed immediately, such as office salaries and selling expenses, whether or not the goods are sold.