What are period Costs?

Period expenses are prices that cannot be capitalized ~ above a company’s balance sheetBalance SheetThe balance sheet is one of the three basic financial statements. The gaue won statements are an essential to both jae won modeling and also accounting.. In other words, they room expensed in the duration incurred and appear on the income statement. Duration costs are likewise called duration expenses.

You are watching: Which of the following is a period cost

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Understanding period Costs

In managerial and also cost accounting, duration costs express to costs that room not tied to or related to the manufacturing of inventory. Examples encompass selling, general and also administrative (SG&A) expenses, marketing expenses, CEO salary, and rent cost relating come a this firm office. The prices are not regarded the production of inventory and also are thus expensed in the period incurred. In short, all expenses that are not associated in the production of a product (product costs) are period costs.

Period prices vs. Product Costs

All prices incurred by a company are either period costs or product costs. Additionally, the two types of prices are taped differently. See the table below for much more comparison:

Product CostsPeriod Costs
Definition:Costs regarded the manufacturing of a productCosts not pertained to the production of a product
Method the Recording:Capitalized ~ above the balance sheet together inventory and also eventually expensed to cost of products sold ~ above the revenue statementExpensed ~ above the revenue statement in the duration incurred
Examples:Direct labor, direct materials, and also manufacturing overheadMarketing expense, selling, general and administrative expense, and CEO salary

To easily identify if a cost is a duration cost or product cost, questioning the question, “Is the cost directly or indirectly regarded the manufacturing of products?” If the answer is no, climate the cost is a duration cost.

Example of period Costs

The following illustrates expenses incurred by a manufacturing company in the an initial year the operations:

$10,000 in direct materials regarded the manufacturing of a product;$5,000 in rent because that the company’s this firm office;$2,000 in marketing campaigns;$300 power bill concerned the company’s manufacturing facility; and$20,000 in salaries regarded the company’s accountants.

Of the item above, i beg your pardon are period costs that should be expensed in the period incurred?

Answer: $5,000 in rent for the company’s that company office, $2,000 in marketing campaigns, and also $20,000 in salaries concerned the company’s accountants are period costs, together they execute not relate come the produce of products. Together such, the total amount of $27,000 must be expensed in the an initial year of operations.

Impact top top the income Statement

When duration costs space expensed, they show up top top the revenue statementIncome StatementThe income Statement is one of a company"s core financial explanation that shows their profit and also loss over a duration of time.The profit or and reduce net income. Take into consideration the following income statement:

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As shown in the income statement above, salaries and also benefits, rent and also overhead, depreciation and also amortization, and also interest room all duration costs that room expensed in the period incurred. On the various other hand, prices of products sold related to product expenses are expensed ~ above the income statement as soon as the list is sold.

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Related Readings

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