Definition

What Is Period Cost? Types of Period Costs with Practical Example

What is Period Cost?

Period Cost is any costs that are not associated or attached to the firm's production line, i.e., those not allocated to any of the business’ financial goods and are, therefore, reflected in the company’s balance sheet for the accounting cycle.

These costs are matched with the revenue of a specific time period rather than included as part of the cost of a salable product. Companies deduct these costs from revenues in the period in which they are incurred in order to determine net income.

Understanding Period Cost

Period expenses are costs that are not connected to or linked to the generation of inventories in management and cost management. SG&A expenditures, marketing costs, CEO salaries, and lease payments for a company headquarters are all included in it.

Because the expenditures are unrelated to inventory production, they are expensed in the period in which they are incurred. In conclusion, period expenses are any costs incurred that are not directly related to the manufacturing of a good. These expenses can be divided into two parts: selling prices and administrative expenses.

Types of Period Costs

The following are three types of period expenses:

1. Current expenditure: Costs incurred by the firm during the current cycle.
2. Historical cost: Costs paid in the preceding quarter should not be included in making decisions.
3. Predetermined expenditure: Expenses that businesses forecast for a future time and compute in order to establish budgeting, which should be taken into account when making choices.

Practical Example

TruBlue Inc., a production firm, documents a few of the expenses made in the month of June 2021 and wishes to calculate the entire period expenses spent in June 2021 by evaluating the same. The expense data are as follows:

\$70,000 in material cost utilized in product manufacture. Straight wages are \$10,000. The remuneration for the accounts department is \$50,000. The company's power bill is \$1000, and the marketing expenses are \$20.000.

Calculation of the Period Cost-

Salary for accounts department = \$50,000

Marketing expenses = \$20,000

Total Period Cost = (50,000 + 20,000) = \$70,000

In Sentences

• Fixed cost expenses, such as acquired assets and paid interest, are not included in period costs.
• When period costs are paid, they appear on your income report and diminish your net revenue.

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