What is Period Cost?
Period Cost can be defined as the items of costs that cannot be recognized with product or job, i.e. they are the costs charged against the revenue for the concerned accounting period and must be written off as expenses for the period in which they are incurred. In general, these are unavoidable business costs.
These costs can be deducted as expenses, in the period in which they are incurred. These are not transferred as a part of inventory to the succeeding accounting period.
In short, period costs are the costs that are not related to the production process or inventory. Put it another way, the costs which are not directly involved in the production of the product are called period costs. These are not expected to provide benefits in a future period, as they are for the current period only.
Therefore, such costs can be attributed to time and accounting period rather than the product and production process.
Another name for such costs is time costs, operating expenses, capacity cost, etc.
Basically, all the fixed manufacturing, general, administrative, selling, and distribution costs are regarded as period costs, because such costs are incurred on a periodic basis.
Period costs cannot be inventoried and are charged to the income statement.
Example of Period Cost
Rent of factory is paid on a monthly basis and is not based on the production. So, rationally, they are regarded as the yearly expenses which are incurred and not carried forward to the next year, as an element of inventory cost.
In the same way, expenses on marketing campaigns, electricity bill of company’s factory, salary to manager, commission, legal and professional fees, utility bills, automobile expenses, repairs and maintenance, employee benefits, advertising and promotion, office expenses, research, and development cost, rent, insurance, and depreciation of plant are some classic examples of period cost.
Accounting Treatment of Period Cost
Period Cost facilitates generation or revenue however they cannot be related to the units of product. In simple words, period costs are the costs that change with the passage of time and not with the total output or production volume. Therefore, they are neither traceable nor assigned to the product, as they are incurred based on time and are not associated with the manufacturing process. Hence, it is not included in the cost of goods sold and so they are shown in the income statement when they are incurred.
In financial accounting, revenue and expenses for the current period are matched with an aim of ascertaining profit for the concerned period.
It must be noted that the classification of period costs and product costs ensures the accuracy of financial reporting.
Types of Period Cost
There are three types of Period Costs:
- Historical Expense: This includes all those expenses which are related to the previous period. Such costs are incurred in the past and thus immaterial, for the purpose of decision making.
- Current Expense: As the name suggests, those expenses which are incurred in the present period are called current expenses.
- Pre-Determined Expense: Expenses that are pre-determined, i.e. not yet occurred, but are based on estimates, after computing them beforehand, so as to prepare budget are called pre-determined expenses. These are considered at the time of decision-making.
In a nutshell, costs that are matched against revenue for the period are called period costs, and so the sum of the deducted as expenses from the revenue of the current expenses from the revenue of the concerned period only. Furthermore, as the period cost is charged to expense, we can also call it a period expense.