Product costing and period costing can impact profit differently. Under product costing, costs are allocated to each unit produced and expensed only when the unit is sold. Under period costing, all costs are expensed upfront. For a business that purchased 5 fridges, treating delivery costs as product costs leads to higher profit if less than 5 fridges are sold, as the costs are allocated per unit sold. If all 5 fridges are sold, profit is the same under both methods as all costs are fully allocated. Product costing delays expensing costs until units are sold, while period costing expenses all costs immediately.

1. 18.6
IMPACT OF PRODUCT
COSTING ON PROFIT

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 Does Product Costing have any impact on profit compared to
Period Costing?
 Won’t they just result in the same profit at the end of the
period?
IMPACT OF PRODUCT COSTING ON PROFIT
Product Costing Period CostingVs.

3. © Michael Allison, Trinity Grammar School.
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 Example: a business buys 5 fridges on 1 March and is charged
a cartage inwards fee of $200 for delivery from the supplier.
 The business is unsure whether to treat the cartage inwards
as either a:
 Product Cost: at a rate of $40 for every unit sold
 Period Cost: costed upfront at $200 before any units are sold
IMPACT OF PRODUCT COSTING ON PROFIT
$200Supplier Business

4. © Michael Allison, Trinity Grammar School.
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 Product Cost: at a rate of $40 for every unit sold
 Period Cost: costed upfront at $200 before any units are sold
IMPACT OF PRODUCT COSTING ON PROFIT
Sell 1 unit $40 $200 Profit = $160 Higher
Sell 2 units $80 $200 Profit = $120 Higher
Sell 3 units $120 $200 Profit = $80 Higher
Sell 4 units $160 $200 Profit = $40 Higher
Sell 5 units $200 $200 Profit = Same
Product Costing Period Costing Impact on Profit

5. © Michael Allison, Trinity Grammar School.
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IMPACT OF PRODUCT COSTING ON PROFIT
40
80
120
160
200
200 200 200 200 200
0
40
80
120
160
200
1 unit sold 2 units sold 3 units sold 4 units sold 5 units sold
Product
Costing
Period
Costing

6. © Michael Allison, Trinity Grammar School.
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 Questions…
 Why is profit the SAME when ALL units are sold?
 Why is profit DIFFERENT when NOT all units are sold?
 Because…
IMPACT OF PRODUCT COSTING ON PROFIT
Product costing
Only expenses a cost when the stock is
sold
For example, the cartage inwards:
• 1 unit sold = $40 expense
• 5 units sold = $200 expense
Period costing
Expenses all of the cost upfront
regardless of the number of items sold
For example, the cartage inwards:
• 1 unit sold = $200 expense
• 5 units sold = $200 expense

7. © Michael Allison, Trinity Grammar School.
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 So as a rule…
IMPACT OF PRODUCT COSTING ON PROFIT
If Product Costing is used for a particular cost instead of Period Costing…
Profit will be the higher if some units remain unsold
Profit will be the same if ALL units are sold

8. © Michael Allison, Trinity Grammar School.
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TASK
In-class Homework
Ex18.3 X
Ex18.4 X