Factory property taxes are classified as a product cost. This classification is important for understanding how costs are allocated in manufacturing.
Product costs include all costs that are directly associated with the production of goods. These can be categorized into three main types: direct materials, direct labor, and manufacturing overhead. Factory property taxes fall under manufacturing overhead because they are necessary for operating the factory and producing products, even though they are not directly tied to the labor or materials used.
On the other hand, a period cost is an expense that is not directly tied to the production of goods and is charged to expense in the period in which it’s incurred. Examples of period costs include selling and administrative expenses.
Since factory property taxes are incurred as part of maintaining the production facility, they are factored into the total cost of producing goods. This classification affects how costs are treated on financial statements, as product costs are capitalized as inventory until the goods are sold, whereas period costs are expensed immediately.