What is Product Warranty Cost?

Product warranty cost is the charge to expense when a product is replaced under a warranty program. This amount may be charged to expense only when warranty costs are incurred, or it may be set up as an allowance, where a standard amount is charged to expense each month. The latter approach is considered to be more correct accounting, since all related costs are charged to expense when revenue is recognized, rather than at a later date. Thus, the use of an allowance for product warranty costs matches all revenues and associated expenses in the same reporting period. This matching of revenues and expenses is known as the matching principle.