Mention must be made of one specific type of period cost: distribution. A distribution cost is any cost incurred to warehouse, transport, or deliver a product or service. Although distribution costs are expensed as incurred, managers should remember that these costs relate directly to products and services and should not adopt an “out-of-sight, out-of-mind” attitude about these costs simply because they have been expensed for financial accounting purposes.
Distribution costs must be planned for in relationship to product/service volume, and these costs must be controlled for profitability to result from sales. Thus, even though distribution costs are not technically considered part of product cost, they can have a major impact on managerial decision making.
In general, product costs are incurred in the production or conversion area and period costs are incurred in all nonproduction or nonconversion areas.
To some extent, all organizations convert (or change) inputs into outputs. Inputs typically consist of material, labor, and overhead. The output of a conversion process is usually either products or services. Firms of professionals (such as accountants, architects, attorneys, engineers, and surveyors) convert labor and other resource inputs (material and overhead) into completed jobs (audit reports, building plans, contracts, blueprints, and property survey reports).
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