Study guide
3.3 Product Costs, Period Costs and the Manufacturing Account
AAT Level 2 Principles of Costing PCTN
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1 Introduction
About the AAT Principles of Costing (PCTN) Assessment
2 Chapter 1: The Cost Accounting Framework
1.1 Purpose and Role of Cost Accounting 1.2 Cost Accounting versus Financial Accounting 1.3 Responsibility Accounting and Cost Centres
3 Chapter 2: Cost Recording, Sourcing, and Coding
2.1 Cost Units and Cost Objects 2.2 Cost Coding Systems and Principles 2.3 Source Documentation and Cost Data Collection
4 Chapter 3: Cost Classification, Behaviour and the Manufacturing Account
3.1 Cost Classification by Element, Nature, and Function 3.2 Cost Behaviour Patterns and Analysis 3.3 Product Costs, Period Costs and the Manufacturing Account
5 Chapter 4: Inventory Valuation and Control
4.1 Inventory Records and Control Procedures 4.2 FIFO and LIFO Inventory Valuation 4.3 AVCO Inventory Valuation and Method Comparison
6 Chapter 5: Labour Costing and Remuneration
5.1 Labour Remuneration: Time Rates, Basic Pay, and Overtime 5.2 Piecework Systems and Incentive Schemes 5.3 Labour Cost Accounting, Idle Time, and Payroll On-Costs
7 Chapter 6: Overheads and Overhead Absorption
6.1 Overheads: Collection, Allocation and Apportionment (Background) 6.2 Overhead Absorption Rates: Per Unit, Per Labour Hour and Per Machine Hour
8 Chapter 7: Budgeting and Variance Analysis
7.1 Budgetary Planning, Principles, and Functional Budgets 7.2 Fixed versus Flexed Budgets 7.3 Calculating Variances: Totals, Adverse or Favourable, and Percentages 7.4 Variance Investigation, Causes, and Management by Exception
9 Chapter 8: Product and Service Costs, and Spreadsheet Tools
8.1 Product Cost Build-Up and Mark-Up versus Margin 8.2 Costing Services: Calculating Costs in Service Organisations 8.3 Entering and Formatting Data in Spreadsheet Tasks 8.4 Writing Costing Formulas the Way AAT Credits Them
3.3 Product Costs, Period Costs and the Manufacturing Account
Key Takeaways Explain This Topic AI
Product costs are included in inventory values until the goods are sold, whereas period costs are charged in full to the period in which they are incurred.
Direct cost equals direct materials used plus direct labour plus any direct expenses, and manufacturing cost adds manufacturing overheads.
Cost of goods manufactured equals manufacturing cost plus opening work in progress minus closing work in progress.
Cost of goods sold equals cost of goods manufactured plus opening finished goods inventory minus closing finished goods inventory.
Administration, selling and distribution costs never appear in the manufacturing account; they are deducted after gross profit.
Last updated: September 2026
3.3 Product Costs, Period Costs and the Manufacturing Account
Key Concept: Product costs are the costs of making the product. They are included in the value of inventory and only reach the statement of profit or loss when the goods are sold. Period costs are the costs of running the rest of the business and are charged in full to the period in which they are incurred. A manufacturing account builds up product cost in a fixed order: direct materials used, direct cost, manufacturing cost, cost of goods manufactured and cost of goods sold.
This topic appears in two places in the PCTN specification. Learning outcome 1 requires you to know the difference between product and period costs, which costs go into a manufacturing account, and how the account is constructed. Learning outcome 2 requires you to understand and calculate direct cost , manufacturing cost , cost of goods manufactured and cost of goods sold . Expect a task that asks you to classify costs and then complete a manufacturing account from a list of figures.
Product Costs versus Period Costs
Feature Product costs Period costs
What they are Costs of producing goods: direct materials, direct labour, direct expenses and manufacturing (production) overheads Costs of administration, selling, distribution and finance
Where they go first Into the cost of inventory (raw materials, work in progress, finished goods) Straight to the statement of profit or loss
When they become an expense When the goods are sold, as part of cost of goods sold In the period in which they are incurred
Examples Timber used, assembly wages, factory rent, depreciation of production machinery, factory supervisor's salary Office rent, sales staff commission, advertising, delivery van fuel, bank interest
The test is simple: was the cost incurred to make the product? If yes, it is a product cost, even if it is indirect (factory rent is an indirect product cost). If it was incurred to run the office, sell the goods or deliver them, it is a period cost.
Two items catch students out:
Carriage inwards (delivery charges on raw materials bought) is part of the cost of materials, so it is a product cost.
Carriage outwards (delivering finished goods to customers) is a distribution cost, so it is a period cost.
The Building Blocks of Product Cost
Each total in the manufacturing account has a definition you must know:
Total How it is calculated
Direct materials used Opening inventory of raw materials + purchases of raw materials − closing inventory of raw materials
- Direct cost (also called prime cost) Direct materials used + direct labour + any direct expenses
- Manufacturing cost Direct cost + manufacturing overheads
- Cost of goods manufactured Manufacturing cost + opening work in progress − closing work in progress
- Cost of goods sold Cost of goods manufactured + opening finished goods − closing finished goods
The pattern repeats three times, once for each type of inventory: add the opening inventory, subtract the closing inventory . Opening inventory was already on hand, so its cost flows into this period. Closing inventory has not been used, finished or sold yet, so its cost is carried forward to next period.
The Manufacturing Account Layout
AAT-style tasks typically present the manufacturing account as a list of line items with subtotals. Learn the order, because a task may ask you to put the items into the correct sequence.
- Line £
- Opening inventory of raw materials X
- Purchases of raw materials X
- Closing inventory of raw materials (X)
- DIRECT MATERIALS USED X
- Direct labour X
- DIRECT COST X
- Manufacturing overheads X
- MANUFACTURING COST X
- Opening inventory of work in progress X
- Closing inventory of work in progress (X)
- COST OF GOODS MANUFACTURED X
- Opening inventory of finished goods X
- Closing inventory of finished goods (X)
- COST OF GOODS SOLD X
Administration, selling and distribution costs never appear in the manufacturing account. They are deducted later, after gross profit, in the statement of profit or loss.
Worked Example: Hebden Furniture Ltd
Hebden Furniture Ltd makes oak dining chairs. Its records for the year show:
Opening inventory of raw materials £12,000; purchases of raw materials £85,000; closing inventory of raw materials £15,000
- Direct labour £64,000
- Manufacturing overheads (factory rent, machine depreciation, supervisor salary, factory power) £38,000
- Opening work in progress £9,000; closing work in progress £11,000
- Opening finished goods £20,000; closing finished goods £24,000
- Administration costs £30,000; selling and distribution costs £22,000
- Sales revenue £290,000
- Manufacturing account for the year
- Line £
- Opening inventory of raw materials 12,000
- Purchases of raw materials 85,000
- Closing inventory of raw materials (15,000)
- DIRECT MATERIALS USED 82,000
- Direct labour 64,000
- DIRECT COST 146,000
- Manufacturing overheads 38,000
- MANUFACTURING COST 184,000
- Opening inventory of work in progress 9,000
- Closing inventory of work in progress (11,000)
- COST OF GOODS MANUFACTURED 182,000
- Opening inventory of finished goods 20,000
- Closing inventory of finished goods (24,000)
- COST OF GOODS SOLD 178,000
The period costs are then deducted in the statement of profit or loss:
- Statement of profit or loss (extract) £
- Sales revenue 290,000
- Cost of goods sold (178,000)
- Gross profit 112,000
- Administration costs (30,000)
- Selling and distribution costs (22,000)
- Operating profit 60,000
Notice what the account tells management. The factory spent £184,000 making things this year, but only £182,000 of finished product came off the line because work in progress built up by £2,000. Cost of goods sold was lower again (£178,000) because finished goods inventory rose by £4,000. If 2,000 chairs were finished during the year, the cost of goods manufactured works out at £182,000 ÷ 2,000 = £91 per chair .
Classifying Costs for the Manufacturing Account
- Cost Product or period? Where it goes
- Wages of assembly operatives Product Direct labour
- Oak purchased for chair frames Product Purchases of raw materials
- Carriage inwards on oak deliveries Product Part of the cost of raw materials
- Factory supervisor's salary Product Manufacturing overheads
- Depreciation of factory machinery Product Manufacturing overheads
- Salary of the finance manager Period Administration (statement of profit or loss)
- Sales staff commission Period Selling and distribution
- Carriage outwards to customers Period Selling and distribution
- Service Organisations
A service business such as a hair salon or an accountancy practice has no raw materials to convert and no finished goods inventory. It does not prepare a manufacturing account, but the same thinking applies: the costs of delivering the service (stylist wages, consumables, salon running costs) form the cost of the service, while head office and marketing costs are period costs. Section 8.2 shows how to calculate the cost of a service.
Common Exam Traps
Reversing inventory adjustments. Opening inventory is always added and closing inventory always deducted, at every stage.
Mixing up the subtotals. Direct cost excludes overheads, manufacturing cost includes manufacturing overheads, and cost of goods manufactured adjusts for work in progress. They are not interchangeable.
Putting period costs in the factory. Office rent, sales commission and carriage outwards never belong in manufacturing overheads.
Treating cost of goods manufactured as cost of goods sold. They differ whenever finished goods inventory changes.