On the income statement, which of the following would be classified as a period cost?
A) Direct Labor.
B) Direct Material.
C) Promotion Expense.
D) Inventory Carry Expense.
Answer Explanation for Question: On the income statement, which of the following would be classified as a period cost?
On the income statement, Promotion Expense would be classified as a period cost. Promotion Expense can be classified as period costs because these are the costs that are not included while manufacturing your product.
Period Costs are those type of costs that cannot be capitalized into prepaid expenses, inventory, or fixed assets or we can also say that these costs are not included in the manufacture or acquisition of your product. Period costs are not carried with the inventory levels. Period costs are expensed in same financial period. These costs are incurred either for sales activity or with the passage of time. All period costs are deducted from the revenue of the same period. Fixed Overhead is treated as period cost in variable costing. Both absorption and variable costing consider costs incurred in the non-manufacturing areas of the organization as period costs and expense these costs in a manner that properly matches the revenues.
Promotion Expense can be classified as period costs because these are the costs that are not included while manufacturing your product. These are the costs incurred as a period of production process. Likewise, there are also other types of period costs which include:
- Office and Administrative Department Expenses (Rent, Electricity Expenses, etc. )
- Marketing Expenses
- Interest Expenses
This is because promotion expenses are costs that are incurred in a specific time period, such as a month or quarter, and are not directly related to the production or sale of a product or service. They are typically considered a part of the company’s selling and administrative expenses, which are generally classified as period costs in the income statement. These costs are not included in the calculation of the product’s cost of goods sold, but are instead reported as a separate expense in the income statement.
Promotion expenses are costs that a company incurs in order to promote its products or services to potential customers. These expenses can include advertising costs, such as television or radio commercials, print ads in newspapers or magazines, or online ads on websites or social media platforms. They can also include costs related to promotional events or campaigns, such as sponsorships, trade shows, or product demonstrations.
While promotion expenses are an important part of a company’s marketing efforts, they are considered a period cost because they are incurred in a specific time period and do not directly contribute to the production or sale of the company’s products or services. Instead, they are intended to generate interest and demand for the company’s products or services, which can ultimately lead to increased sales.
Income statements typically report promotion expenses under the category of selling and administrative expenses, which also includes other costs such as salaries, rent, and utilities. These expenses are typically considered indirect costs, as they are not directly related to the production or sale of the company’s products or services.
Overall, the classification of promotion expenses as period costs in the income statement reflects their nature as a necessary expense for a company’s marketing efforts, but one that does not directly contribute to the production or sale of its products or services
Under Variable Costing
Period Costs = Fixed Manufacturing Costs + General Administrative Costs + Selling and Distribution Costs
Under Absorption Costing
Period Costs = General Administrative Costs + Selling and Distribution Costs
Period costs are Costs that cannot be capitalized into prepaid expenses, inventory, or fixed assets. On the income statement, this type of cost is not included in cost of goods sold. It is typically reported within the selling and administrative expenses section of the income statement. Those expenses included in prepaid expenses, including rent, do not constitute period costs. In addition, inventory costs such as direct labor, direct materials, and manufacturing overhead are not classified as period costs. Lastly, costs associated with fixed assets, such as purchased assets and capitalized interest, are not considered period costs.
Types of Period Costs
- Historical Period Expenses
Expenses that have already been incurred or occured in previous periods are not considered for any decision making for the current period. These could only be considered for comparison purposes.
- Current Period Expenses
These expenses are related to the period in which the company has incurred expenses. Management considers these expenses when evaluating the company’s current financial position and when making decisions for the current period.
- Pre-Determined Period Expenses
According to the management’s assessment based on trends and other factors that would potentially affect the expenses in the future period, these are the expenses that are expected to be incurred by the company in the future. The management uses these expenses when preparing budgets for upcoming periods.
Importance of Period Cost
- Period costs play a crucial role in the operation of the business. Unlike production costs, period costs impact the running of the business, although they are not directly linked to inventories. All indirect expenses that contribute to a business’ financial success are included in period costs.
- The evaluation of period costs assists the management team of the business in making proper business decisions, since they play a critical role in evaluating the financial state of the business.
- The purpose of keeping track of your total period cost is to estimate the net income of your business for each accounting period. This can be helpful when preparing business taxes. Your business can also prepare for audits by keeping track of your total period costs.
- Tracking period costs may also help a business to Balance their budget, gain important savings, Focus on growing their business and controlling their direct costs, Seek better ways to control costs,etc.
Common Period Costs
Here are some common types of period costs that business may have:
- Legal and professional fees: Lawyers, accountants and other advisors that businesses may pay for
- Office expenses: Expenses such as supplies, rent and other office-related expenses
- Utilities: Water, electric, gas and other utilities
- Advertising and promotion: Marketing expenses such as commercials, social media ads and other promotional items
- Maintenance and repairs: The upkeep of the office and payments for damages on any equipment that requires repairs
- Travel, meals, and entertainment: Expenses acquired during business trips
- Salaries: The money companies pay to their employees for their work
- Employee benefits: Expenses such as retirement accounts, health insurance and other employee benefits
- Insurance: Businesses usually have insurance costs to cover their assets
- Interest on loans and other liabilities: Many businesses must pay interest back on loans each month
- Automobile expense: Any company vehicles that are not related to manufacturing or delivery of products
People Also Ask,
Is depreciation expense a period cost ?
Depreciation expense is often listed as an expense on a company’s income statement, but some experts say it might not be a period cost. depreciation expense is usually a fixed cost that remains the same regardless of how much revenue a company generates during a given period. But some economists argue that depreciation isn’t really a fixed cost at all – it can actually decrease as companies produce more goods and services. This phenomenon is known as capital depletion, and it’s something to consider when calculating a company’s profitability.
Is promotion expense a period cost ?
In the world of business, promotion expense is always a topic of debate. Some believe that promotion expense is a necessary part of running a successful business, while others believe that it is an unnecessary waste of money. The answer to this question may actually be somewhere in the middle.
Promotion expense can actually be considered a period cost. This means that it is something that should be accounted for during the overall financial planning process, just like other expenses such as advertising, salaries, and supplies. However, too much promotion expense can actually have negative effects on a company’s bottom line. Overly costly campaigns can lead to lost customer trust and reduced sales volume. It’s important to strike the right balance between promoting your product and maintaining profitability.
Is R&D expense a period cost?
R&D expense is often thought of as a one-time cost, but that’s not always the case. In fact, R&D expense can be a period cost if it’s used to develop new products or services. This means that R&D expense can be an important part of a company’s overall budget, even if it doesn’t appear on the surface to be a major expense.