Bookkeeping Period Costs Definition, Example, Impact on Income Statement

Freight would be considered a period cost if it is paid to ship the finished product to customers. This freight cost reflects a selling/distribution expense rather than a production expense. Let’s look at a few examples of period costs to illustrate the concept. If that reporting period is over a fiscal quarter, then the period cost would also be three months. If the accounting period were instead a year, the period cost would encompass 12 months.

A period cost is charged to expense on the income statement as soon as it is incurred. 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. Before discussing the examples, let’s discuss the formula of period cost. As mentioned before, there is no clear formula for calculating period costs.

Time

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. 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. The period cost is important and a necessary thing to keep track of because it allows you to know your company’s net income for each accounting period.

Other examples of period costs include marketing expenses, rent (not directly tied to a production facility), office depreciation, and indirect labor. Also, interest expense on a company’s debt would be classified as a period cost. The period costs could not be capitalized since they are not directly tied to the manufacture of inventory and are thus charged in the company’s profit and loss statement.

Period Costs Examples: From Advertising to Rent

In other words, they are expensed in the period incurred and appear on the income statement. In accordance with the accounting standards for external financial reporting, the cost of inventory must include all costs used to prepare the inventory for its intended use. It follows the underlying guidelines in accounting – the matching principle. Absorption costing better upholds the matching principle, which requires expenses to be reported in the same period as the revenue generated by the expenses. Note that product costs are costs that go into the product while period costs are costs that are expensed in the period incurred.

• Liabilities are normally things that are settled over time through the transfer of money, goods, or services.
• Once they’re on the income statement, the accountant can deduct them from the gross profit to calculate the period’s net income.
• All of the units transferred to the next department must be 100% complete with regard to that department’s cost or they would not be transferred.
• Print out your income statement from your accounting software and add a small column to the right.
• Following accounting standards, the cost of inventory, or cost of goods sold, is any cost incurred to get inventory ready to be sold.
• However, it may pay off in the long run if they deliver high-quality code.
• Costs that cannot be capitalized on a company’s balance sheet are referred to as period costs.

Advertising costs are easier to attribute to a time period for instance the advertising budget for the current year. Other general and administrative costs like office salaries can’t be allocated to products. There is no specific method or formula for calculation of period costs.

HIGH LOW METHOD ACCOUNTING: Definition, Formula & Examples

In other words, they are expensed in the period in which they occur and are recorded on the income statement. When period costs are expensed, they appear on your income statement and diminish your net income. To acquire a better idea of your costs and how much you spend on each, you may choose to segregate period costs by category on your income statement.

For example, if you alter insurance premiums or even switch to a firm with lower premiums, the price difference must be reported. Reassessing your period period costs formula costs may assist you in identifying areas where you can save money. Both product costs and period costs may be either fixed or variable in nature.