Period costs definition
/What are Period Costs?
A period cost is any cost that cannot be capitalized into prepaid expenses, inventory, or fixed assets. A period cost is more closely associated with the passage of time than with a transactional event. Since a period cost is essentially always charged to expense at once, it may more appropriately be called a period expense. 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, it is typically included within the selling and administrative expenses section of the income statement.
Examples of Period Costs
Examples of period costs are as follows:
Travel and entertainment 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 can be considered period costs.
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Items That are Not Period Costs
Multiple costs are not classified as period costs. Here are the main categories of costs not considered to be period costs:
Prepaid expenses. These items, such as prepaid rent and prepaid advertising, are typically charged to expense over a period of time, usually within a few months.
Inventory costs. Costs included in inventory, such as direct labor, direct materials, and manufacturing overhead, are not classified as period costs. This is because it may be several months before the associated goods are sold, at which point these items are charged to expense.
Fixed asset costs. Costs included in fixed assets, such as purchased assets and capitalized interest, are not considered to be period costs, because they are charged to expense over a protracted period of time that may span many years.
How to Identify a Period Cost
If the entire use to which a cost can be put is consumed in the current accounting period (such as rent or utilities) it is probably a period cost, whereas if its use is linked to a product or is spread over multiple periods, it is probably not a period cost.
Period Costs vs. Product Costs
Every cost incurred by a business can be classified as either a period cost or a product cost. A product cost is incurred during the manufacture of a product, while a period cost is usually incurred over a period of time, irrespective of any manufacturing activity. A product cost is initially recorded as inventory, which is stated on the balance sheet. Once the inventory is sold or otherwise disposed of, it is charged to the cost of goods sold on the income statement. A period cost is charged to expense on the income statement as soon as it is incurred.
Terms Similar to Period Costs
A period cost is also known as a period expense.