Definition
Period cost is the cost that is not based on the one-time transactional event rather it is incurred over specific time. These costs are not directly related to the cost of production. Further, these expenses are not mentioned in the balance sheet but are treated in the income statement. Such types of costs are also not capitalized into inventory, fixed assets, or prepaid expenses. This implies that prepaid expenses, direct labor, direct material, etc are not period expenses.
Under the selling and administrative expenses section, these costs are treated as expenses in the income statement. There are many examples of period costs that businesses may incur such as rental expenses and many others. Additional examples are discussed later in the article. Before discussing the examples, let’s discuss the formula of period cost.
Period cost formula:
There is no standard formula to calculate the period cost. Accountants, however, normally deduct these expenses from the revenues. This operation is performed on the income statement to get the overall profit or loss for the business.
Period cost example:
To look more precisely at the period costs, consider the following examples. On the income statement, the following would be classified as period expenses:
Advertising expense is also continually incurred from period to period which means it is not based on a one-time transaction. So advertising expense is a period cost.
Depreciation expense is also treated as period cost on the income statement.
Travel expenses are also associated with period costs and come under the selling and administrative expense.
Administrative salaries and other benefits are also the period expenses.
Office rent and other general administrative expenses are treated as period costs.
These examples clarify that period expenses are incurred over time and not the direct costs related to the product production. Let’s discuss period vs product cost to further understand the concept.
Also read, Accounting true up.
Product cost vs period cost:
Product costs have a direct link with the production of the product, whereas, period costs do not directly link with the product production. The main difference in accounting is their treatment in the financial statements.
Period costs are recorded on the income statement while the product costs are recorded on the balance sheet as inventory. This product cost is then transferred in the income statement within the cost of goods sold.
The examples of product costs include direct labor (the people directly involved in the manufacturing of product), direct materials (all the raw materials directly related to product production), and the manufacturing overhead. While the period costs are the selling and administrative expenses as discussed earlier.
Final word:
In a nutshell, period costs are not directly related to the production process. Period expenses are recorded in the income statement as an expense. Product costs are first recorded as inventory in the balance sheet and are then further recorded in the income statement as the cost of goods sold. Hoping the above discussion has proved fruitful for you to clear the concept of period costs and how they are different from product costs!
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