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Overview of Period Costs
Definition of
Period Costs
What are Period Costs? Period Costs are all expenses that are not included in product costs (i.e., not directly tied to the manufacturing or acquisition of goods for sale). Instead, period costs are expensed on the income statement in the specific period in which they are incurred. They are typically associated with the passage of time rather than the production process itself. Common examples include selling expenses (like sales salaries, advertising) and general & administrative (SG&A) expenses (like office rent, administrative staff salaries, utilities for the office).
Activities Related to
Period Costs
Here is a list of Period Costs related activities:Â
Recording administrative salaries and office rent, Expensing marketing and advertising costs as they occur, Accounting for sales commissions, Booking utility expenses for administrative offices, Recognizing office supplies used, and Preparing the income statement where these costs are reported.
Unlike product costs that are inventoried, period costs are expensed immediately in the accounting period they are incurred, impacting that period's net profit.
The Importance of
Period Costs
For small business owners, understanding Period Costs is essential for accurate financial reporting and profitability analysis. Since these costs are expensed in the period they happen, they directly affect the calculation of net profit on the income statement for that specific period. Distinguishing period costs from product costs (which are capitalized as inventory and expensed as COGS when sold) is crucial for correct inventory valuation and income measurement according to accrual accounting principles. Proper classification helps in effective expense tracking and control.
Key Aspects of
Period Costs
Not Product-Related
Period costs are not directly associated with the production or acquisition of goods intended for sale; they relate to general business operations.
Expensed When Incurred
They are recognized as an expense on the income statement in the accounting period in which they occur, regardless of when products are sold.
Typically SG&A
Most Selling, General, and Administrative (SG&A) expenses, such as office salaries, rent for administrative buildings, and marketing costs, are considered period costs. Many are also fixed costs.
Concepts Related to
Period Costs
Period Costs are distinguished from product costs (which become part of inventory and then Cost of Goods Sold). They are a major category of Operating Expenses. Understanding period costs is crucial for Accrual Accounting and preparing an accurate Income Statement. Many fixed costs, such as monthly rent or administrative salaries, are period costs. They directly impact a company's net profit for the period.
Period Costs
in Action:
The Adventures of Coco and Cami
Follow Coco and Cami as they learn that some expenses, like their monthly advertising budget or the salary for their part-time accountant, are recorded in the month they happen.
Watch as Professor A explains Period Costs to Coco and Cami, showing how these expenses are different from the costs of their ingredients and are matched to the time they are incurred.