Distinguish between product costs and period costs as they relate to inventory.

Product costs are the cost related to the acquisition of materials and converting them to finished goods.

When raw materials are purchased, different costs are incurred, like acquisition, carriage, handling, installation, etc.These all costs constitute the raw material or inventory cost and are debited to the inventory account.

When the acquired inventories are converted to finished goods, different costs like – labor cost, wages, and other costs are incurred.These costs constitute total conversion costs.

Period costs are not directly related to the material or production. But these costs help in selling and administrating the production. These costs are not attached to the inventory.

Common examples of period costs are – Selling expenses, administrative costs, interest expenses, etc.