Importance of Classifying Period Cost and Product Cost Assignment

Importance of Classifying Period Cost and Product Cost - Assignment Example The period costs are normally reported in form of expenditures in the period of accounting in which they match the best with revenues, in the period of accounting and when they expire. In addition to general administrative and selling expenses, most of the interest expenses are categorized as a period expense. Mr Smith’s classification of these costs, therefore, would increase the reported earnings of the period. The classification of the period cost and product cost is hence important since the classification will ensure that the net income is properly measured during the time period in which the best match. Classifying period cost and product cost will also ensure that Mr Smith reports the proper inventory cost appearing on the balance sheet. It is also important to classify these costs since the two costs cling to the units of the manufactured or purchased products. This will increase the reported period earnings because if any unit of a product will not be sold, the produc t cost will appear as a current asset on the balance sheet since it will be reported as an inventory. The classification will also ensure that the product cost will be reported at the expense of the cost of sold goods on the income statement for the period in which the product units were sold. In addition, classifying period costs will ensure that the expenses incurred in sales and salaries of the general administration are only featured during the exact period in which those salaries were paid to the employees. This will increase the reported earnings of the company. The actions of Mr Smith to postpone expenditures to the new year such as cancelling or postponing supplier orders, delaying maintenance already planned, and cutting down on the travels and adverts of the end year is ethical enough since it was in the best interest of the company to report an increase in the end year earnings. By ordering reclassification of both the period and product costs, Mr Smith significantly increased the reported earnings since every particular period cost was to be reported in the financial year to which it relates to.