Period Costs
Period cost refers to any expense that cannot be capitalized into prepaid expenses, inventory, or fixed assets. They cannot be capitalized on a company’s balance sheet. Period costs are more closely related to the passage of time than they are to transactional events. As period cost is always charged to expenses at once, it is better referred to as a period expense. Period costs are charged to expense in the period they are incurred. On the income statement, this type of cost is not included in cost of goods sold. Instead, it is usually included in the selling and administrative expenses section of the income statement.
Period costs aren’t attached to one particular product or the cost of inventory like product costs. As a result, period costs are categorized as an expense in the accounting period in which they occur.
According to managerial and cost accounting, period costs are costs that are not associated with or related to the production of inventory. Some of the examples of period cost include selling, general and administrative (SG&A) expenses, marketing expenses, CEO salary, and rent expense relating to a corporate office. These costs are not related to the production of inventory and that’s why expense in the period is incurred. Therefore, all costs which are not involved in the production of a product are period costs.
Difference between Product cost and Period cost
Product Cost | Period Cost |
| The costs which are related with the production of product is known as product cost. | The costs which are not related with the production of product is known as period cost. |
| They are directly tied with production process. | They are not directly tied with production process. |
| It is capitalized as inventory on the balance sheet and ultimately expensed to cost of goods sold on the income statement. | Its expenses are recorded on the income statement in the period incurred. |
| They are assigned with a one particular product. | They are not assigned with one particular product. That’s why, they are listed as an expense in the accounting period in which they occurred. |
| It is volume-oriented cost. | It is time-oriented cost. |
| It is also known as inventorial costs. | It is also known as operating costs. |
| Some of its examples are; Direct labor, direct materials, and manufacturing overhead. | Some of its examples are; Marketing expense, selling, general and administrative expense, and CEO salary. |
Formula to calculate Period Cost
Period costs cannot be calculated using a specific method or formula. In order to calculate period costs, the management could examine the records of period costs and identify the costs that are not directly associated with the production of inventory but are charged to the statement of profit and loss. Therefore, with this method, the management could identify any expenses that were categorized as period costs, making it easy to compare the figures with those from previous years.
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
Types of Period Cost
The types of period cost are as follows:
- Historical Period Expenses:The period expenses that are already incurred in the previous prior periods and are not considered for any decision making to be done for the current period is known as historical period expenses. The expenses could only be used as comparison data.
- Current Period Expenses:The expenses of the period expense which has been incurred in the current period by the company is known as current period expenses. The management uses these expenses to evaluate the current situation and financial position of the firm, as well as to make decisions for the current period based on the data and facts.
- Pre-Determined Period Expenses: The expenses of the period expense which are expected to be incurred in the future by the company as per the evaluation made by the management upon considering trends and many different factors that could affect these same figures in the future. These expenses are used by the management while preparing budgeting for the upcoming periods.
Importance of Period Cost
Some of the importance of period costs for running a successful business are as follows:
- Period costs are key for running the business. It includes all the indirect expenses which form a key role in the financial success of the business.
- Evaluation of the period costs allows the management of the company for proper planning, as they play an important role in evaluating the financials of the company.
- Period costs are directly charged to a company’s profit & loss account and therefore are considered in the calculation of the company’s profit or loss.
- The management can keep track of the fixed costs incurred which are not very dynamic through the evaluation of period costs.
Advantages of Period Cost
Some of the advantages of period cost are as follows:
- The period costs are used to keep track of the company’s other expenses, which do not directly relate to the production of goods but significantly affect the profits made through the business.
- Periodic costs tend to be less volatile or dynamic. Analyzing the period expenses which are continuously increasing or reporting increases in subsequent periods will assist management in having the ability to identify the need and reason for such increases and thus assist in reducing them, which will help the financials of the company to be more profitable.
- It includes administrative, sales, distribution costs, and other indirect costs which may help the managers to prepare accurate financial statements.
- Managing and studying period costs allows management and operations teams to reduce the costs incurred in the period expenses and determine the best way to imply those costs and yield the best results.
Example of a Period Cost
ABC Inc., a manufacturing company, keeps a record of some of the expenditures it made in June 2020 and, by evaluating the same, wants to determine the total monthly expenditures for June 2020. The records of expenditures consist of the following:
Direct Materials used in manufacturing of products Rs.10,000
Direct wages Rs. 5,000
Salary for accounts department Rs.30,000
Electricity Bill of the factory for the month Rs.700
Advertisement expenses Rs.5,000
Solution:
Calculation of Period Cost
| Salary for accounts department | Rs.30,000 |
| Advertisement expenses | Rs. 5,000 |
| Total Period Cost | Rs. 35,000 |
In the above solution, the expenses which are compiled for the calculation of Period costs are not related. The other expenses mentioned there will not be considered as a period cost as they are directly related to the process of production of inventory.
FAQs on Period Costs
Which of the following is the period costs?
A) Rent on a factory building
B) Depreciation on factory equipment
C) Commissions paid on each unit sold
D) Raw materials cost
Is Insurance a period cost?
Ans: Insurance expense is a period cost. Period costs are such type of cost which is incurred business and are not directly related to production levels. These expenses do not have any relation to the inventory or production process but are incurred on a regular basis, regardless of the level of production. Insurance expenses also do not have any relation to production process and incur in regular basis. That’s why, insurance is considered as a period cost.
What items are not included in period cost?
Ans: Period costs do not include expenses included in prepaid expenses, such as rent. Costs associated with inventory, such as direct labor, direct materials, and manufacturing overhead, are not included in period costs. As a final point, costs associated with fixed assets, such as purchased assets and capitalized interest, are not considered period costs.
How can we identify a period cost?
Ans: The entire use of a cost is consumed during the current accounting period (such as rent or utilities), whereas its use is tied to a product or is spread across more than one period, it is most likely not a period cost.
References
Accounting Tools. (2021, June 19). Retrieved from Accounting Tools: https://www.accountingtools.com/articles/what-is-a-period-cost.html
Corporate Finance Institute. (n.d.). Retrieved from Corporate Finance Institute: https://corporatefinanceinstitute.com/resources/knowledge/accounting/period-costs/
Girsch-Bock, M. (2020, October 26). the blueprint. Retrieved from the blueprint: https://www.fool.com/the-blueprint/product-vs-period-cost/
Murphy, C. B. (2021, April 30). Investopedia. Retrieved from Investopedia: https://www.investopedia.com/ask/answers/102714/what-are-differences-between-period-costs-and-product-costs.asp
Thakur, M. (n.d.). Educba. Retrieved from Educba: https://www.educba.com/period-costs/
On the income statement, which of the following would be classified as a period cost?
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