A period cost refers to expenses incurred during a specific accounting period that are not directly associated with the production of goods or services. These costs are expensed on the income statement in the period in which they are incurred, rather than being inventoried as part of the cost of goods sold (COGS). Period costs are typically considered operating expenses and are deducted from revenues to determine the net income of a business.
Period costs can take various forms, including selling, general, and administrative (SG&A) expenses, such as marketing and advertising expenses, salaries and wages of administrative staff, office rent, utilities, insurance, and IT expenses. These costs are necessary for the ongoing operation of a business and are typically unrelated to the production volume or the number of units sold.
An example of a period cost is the marketing and advertising expenses incurred by a company to promote its products or services. These costs are incurred periodically to generate sales, enhance brand recognition, and attract customers. They are essential for maintaining the company’s market presence but do not directly contribute to the production or delivery of goods. As such, marketing and advertising expenses are classified as period costs.
Another example of a period cost is rent for office space. Rent is paid regularly to maintain a physical location where administrative functions are performed, but it does not directly impact the production process or the creation of goods or services. Therefore, the cost of rent is considered a period cost.
Salaries and wages of administrative staff are also considered period costs. These expenses occur irrespective of the production or sales volume and are necessary for the day-to-day functioning of a business. While employees directly involved in production might be classified as part of the cost of goods sold, the salaries of individuals in administrative roles are considered period costs.
Utilities, insurance premiums, and IT expenses are additional examples of period costs. These costs are incurred on an ongoing basis to support the overall operations of a business but do not directly contribute to the creation of goods or services.
Overall, period costs are ongoing expenses necessary for the administration and management of a company. They are incurred regardless of the level of production or sales and are expensed in the accounting period in which they occur. By segregating period costs from product costs, businesses can effectively evaluate and track the expenses associated with running the business itself, providing crucial insights into the financial health and efficiency of the organization.
In summary, period costs are expenses incurred during a specified accounting period that are unrelated to the production process or the creation of goods and services. Examples of period costs include marketing and advertising expenses, office rent, salaries of administrative staff, utilities, insurance, and IT expenses. These costs are deducted from revenues as operating expenses and are crucial for the ongoing operation of a business. Understanding and properly categorizing period costs is vital for accurate financial reporting and analysis.
