Period cost is any cost that cannot be capitalized as direct cost relating to inventory, property, plant and equipment or investment property and prepaid expenses. A period cost is more closely associated with the passage of time than with a transactional event. Period costs are also called period expenses.
It can be capitalized as fixed production overhead and general overhead in the costs of conversion when producing inventory (see Inventories – the highlights, inventory items such as sub-assemblies, work in process and finished goods).
A period expense is charged to profit or loss expense in the period incurred/allocated over the period it relates to (through recording prepaid expenses, amortised monthly/quarterly/annually as period expenses, or through accrued as expensed liabilities, recorded monthly/quarterly/annually as period expenses). This type of cost is not included within the cost of goods sold on the income statement. Instead, period expenses not being fixed production overhead, is typically included within the selling and administrative expenses section of the income statement (or general overhead). Examples of such period expenses are:
- Selling expenses
- Advertising expenses
- Travel and entertainment expenses
- Depreciation expense (PPE cost held for use over more than one period and as a result capitalised and its allocation to period costs over its economic life)
- General and administrative expenses
- Executive and administrative salaries and benefits
- Office rent
- Interest expense (that is not capitalized into a fixed asset)
The preceding list of period expenses should make it clear that most of the administrative costs of a business or overhead can be considered period costs.
Understanding Period Costs
In managerial and cost accounting, period costs refer to costs that are not tied to or related to the production of inventory. Examples include selling, general and administrative (SG&A) expense, marketing expenses, CEO salary, and rent expense relating to the corporate office. The costs are not related to the production of inventory and are therefore expensed in the period incurred. In short, all costs that are not involved in the production of a product (product costs) are period costs.
Period Costs versus Product Costs
All costs incurred by a company are either period costs or product costs. Additionally, the two types of costs are recorded differently. See the table below for more comparison:
Period Costs (period expenses)
Costs not related to the production of a product
Definition: Costs related to the production of a product
|Expensed on the income statement in the period incurred||
Method of Recording: Capitalized on the balance sheet as inventory and eventually expensed to cost of goods sold on the income statement
|Marketing expense, selling, general and administrative expense, and CEO salary||
Examples: Direct (production) labor, direct materials, and manufacturing overhead
Difference with product costs / inventory
The key difference between product costs and period expenses is that product costs are only incurred if products are acquired or produced, and period costs are associated with the passage of time. Thus, a business that has no production or inventory purchasing activities will incur no product costs, but will still incur period costs.
Product costs are initially recorded within the inventory asset. Once the related goods are sold, these capitalized costs are charged to expense. This accounting is used to match the revenue from a product sale with the associated cost of goods sold, so that the entire effect of a sale transaction appears within one reporting period’s income statement.
Examples of product costs are direct materials, direct labor, and allocated factory overhead. Examples of period costs are general and administrative expenses, such as rent, office depreciation, office supplies, and utilities.
Period expenses are sometimes broken out into additional subcategories for selling activities and administrative activities. Administrative activities are the most pure form of period costs, since they must be incurred on an ongoing basis, irrespective of the sales level of a business. Selling costs can vary somewhat with product sales levels, especially if sales commissions are a large part of this expenditure.
Product costs are sometimes broken out into the variable and fixed subcategories. This additional information is needed when calculating the break even sales level of a business. It is also useful for determining the minimum price at which a product can be sold while still generating a profit.
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