Last update 21/08/2019
Period cost is any cost that cannot be capitalized as direct cost relating to inventory, property, plant and equipment or investment property. A period cost is more closely associated with the passage of time than with a transactional event.
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 cost is charged to expense in the period incurred. This type of cost is not included within the cost of goods sold on the income statement. Instead, period costs 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 costs are:
- Selling expenses
- Advertising expenses
- Travel and entertainment expenses
- Commissions
- 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 costs should make it clear that most of the administrative costs of a business or overhead can be considered period costs.
Difference with product costs / Inventory
The key difference between product costs and period costs 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 costs 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.
Period cost
Period cost
Period cost Period cost Period cost Period cost Period cost Period cost Period cost Period cost