Home Accounting Period Costs (Definition And Examples: All You Need To Know)

Period Costs (Definition And Examples: All You Need To Know)

What are Period Costs?

What expenses are qualified as period expenses?

How does it work?

Keep reading as we have gathered exactly the information that you need!

Let’s dig into our cost accounting knowledge!

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What Are Period Costs

Period costs are the costs incurred by a company to produce goods or render services that cannot be capitalized into prepaid expenses, inventory, or fixed assets.

In other words, period costs are expenses that are not linked to the production process of a company but rather are expenses incurred over time.

For example, the sales, general, and administrative charges represents a good example of a period cost as these are charges that are not linked to the production of a specific product and are incurred over a period of time.

Generally, companies incur two types of costs when producing goods:

  • Period costs
  • Product costs

The product costs are the costs incurred by a company directly related to the production of goods.

Since product costs are linked to a product, a company can report such costs in the category of cost of goods sold on the income statement.

On the other hand, since product costs like office expenses, administration expenses, marketing expenses, rent, and so on cannot be linked to the cost of goods sold, they will be charged to the expense account.

Period Cost Definition

According to the Corporate Finance Institute, period costs are defined as follows:

Period costs are costs that cannot be capitalized on a company’s balance sheet. In other words, they are expensed in the period incurred and appear on the income statement. Period costs are also called period expenses.
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As you can see from this financial definition, period costs are:

  • Costs that are not capitalized on the balance sheet
  • Incurred during a period 
  • Costs that appear on the income statement 

How Does Period Cost Work

Period costs or period expenses are specific type of expenses a company may incur during an accounting period without being able to link it to inventory or cost of goods sold.

As a resuld, period expenses appear on a company’s income statement and reduce the company’s total income.

For example, a company will deduct expenses such as sales costs, overhead costs, rent, or marketing expenses from its total income to derive its net income.

Accountants and company managers must analyze the company’s costs to determine whether they fall under the period category or product category as there’s no set product cost formula to get a precise calculator.

One way to identify a period cost is to assess how the cost is incurred.

If a cost is incurred during an accounting period, you are likely looking at a period cost.

On the other hand, if a cost is linked to a product, inventory, production, or goods and may be incurred over several accounting periods, you may be looking at a product cost.

Another way to identify period costs is to establish what doesn’t qualify as such.

Costs and expenses that are capitalized, related to fixed assets, related to purchase of goods, or any other capitalized interest are not period costs.

In general, a company accountant should:

  • Track the company’s expenses 
  • If the costs relate to capitalized assets, fixed assets, or product, they will get labelled as product cost
  • If the costs relate to unavoidable business expenses such as sales expenses, administration expenses, advertising and promotion expenses, rent, utilities, insurance and so on, they will fall under the bucket of period expenses
  • The period costs will end up in the income statement 

Period Cost vs Product Cost

What is the difference between period costs and product costs?

The main difference between period cost vs product cost is that the “period” cost are costs associated with a period of time whereas “product” costs are associated to the production or acquisition of goods.

A business producing goods will have to incur expenses to produce the goods such as:

  • Labor costs 
  • Purchase of raw material 
  • Manufacturing supplies 
  • Overhead expenses linked to the production 
  • Inventory costs 

On the other hand, a company that does not produce goods or does not carry inventory of any kind will not have any product costs to report on its financial statements.

“Period costs” or “period expenses” are costs charged to the expense account and are not linked to production or inventory.

Examples of period costs are:

  • Selling, general, and administrative expenses
  • Marketing expenses
  • CEO salary
  • Rent expenses 

The main characteristic of these costs is that they are incurred over a period of time (during the accounting period).

Period Cost Examples

Let’s look at a few examples of period costs to illustrate the concept.

Period costs include:

  • Marketing and advertising expenses
  • Travel expenses
  • Entertainment expenses
  • Rent 
  • Interest expenses on uncapitalized assets
  • Selling expenses 
  • Depreciation expenses 
  • Sales, general, and administrative expenses (SG&A)
  • Utilities
  • Legal and professional fees
  • Maintenance and repairs to office 
  • Employee benefits 
  • Insurance costs
  • Automobile expenses 

Now let’s look at a hypothetical example of costs incurred by a company and see if such costs are period costs or product costs.

Imagine a company produces goods and incurs the following expenses:

  • $20,000 to purchase raw materials to produce the goods
  • $10,000 in labor costs related to employees working on the product
  • $5,000 in office rent
  • $5,000 in marketing expenses
  • $1,000 in electricity to power the production plan
  • $10,000 in sales and administrative expenses

As a result, the company spent $51,000 in total.

We can then classify the following costs as product costs:

  • $20,000 to purchase raw materials to produce the goods
  • $10,000 in labor costs related to employees working on the product
  • $1,000 in electricity to power the production plan

Then, we can classify the following cost as period costs:

  • $5,000 in office rent
  • $5,000 in marketing expenses
  • $10,000 in sales and administrative expenses

“Period Costs” In Accounting Takeaways 

So, what is a period cost?

How to calculate period cost?

Let’s look at a summary of our findings.

Period Costs Meaning

  • “Period costs” are costs that are typically linked to the passing of time and accounting period as opposed to production costs 
  • A company’s costs incurred over a period of time can include sales and general administration costs, rent, utilities, insurance, legal, accounting or professional fees, travel, meal, or entertainment costs and so on 
  • When a company’s costs can be allocated to manufacturing, production, or inventory, then such costs are considered to be “product costs”
Capitalized interest 
Conversion costs 
Cost of goods sold 
Depreciation expense 
Direct costs
Direct labor costs
Direct labor 
Direct material costs
Direct materials 
Fixed asset acquisition
Incremental costs 
Indirect costs 
Interest expense 
Manufacturing overhead 
Manufacturing overhead 
Prepaid rent 
Prime costs
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Absorption costing 
Accounting cycle 
Amortization costs 
Average costs 
Balance sheet 
Cost accounting 
Cost curve 
Debt service
EBITDA
Fixed costs
Forward integration 
Gross profit 
Income statement
Managerial accounting 
Net income 
Net operating working capital 
Pro forma balance sheet
Pro forma income statement
Total costs 
Variable costs
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Hello Nation! I'm a lawyer by trade and an entrepreneur by spirit. I specialize in law, business, marketing, and technology (and love it!). I'm an expert SEO and content marketer where I deeply enjoy writing content in highly competitive fields. On this blog, I share my experiences, knowledge, and provide you with golden nuggets of useful information. Enjoy!

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