Period Costs: Definition, Examples & Impact on Financial Statements

Period costs are costs that cannot be capitalized on a company’s balance sheetBalance SheetThe balance sheet is one of the three fundamental financial statements. The financial statements are key to both financial modeling and accounting.. In other words, they are expensed in the period incurred and appear on the income statement. Period costs are also called period expenses.

Understanding Period Costs

In managerial and cost accounting, period costs refer to costs that are not tied to or related to the production of inventory. Examples include selling, general and administrative (SG&A) expenses, marketing expenses, CEO salary, and rent expense relating to a corporate office. The costs are not related to the production of inventory and are therefore expensed in the period incurred. In short, all costs that are not involved in the production of a product (product costs) are period costs.

Period Costs vs. Product Costs

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

 Product CostsPeriod CostsDefinition:Costs related to the production of a productCosts not related to the production of a productMethod of Recording:Capitalized on the balance sheet as inventory and eventually expensed to cost of goods sold on the income statementExpensed on the income statement in the period incurredExamples:Direct labor, direct materials, and manufacturing overheadMarketing expense, selling, general and administrative expense, and CEO salary

To quickly identify if a cost is a period cost or product cost, ask the question, “Is the cost directly or indirectly related to the production of products?” If the answer is no, then the cost is a period cost.

Example of Period Costs

The following illustrates costs incurred by a manufacturing company in the first year of operations:

• $10,000 in direct materials related to the production of a product;
• $50,000 in salariesRemunerationRemuneration is any type of compensation or payment that an individual or employee receives as payment for their services or the work that they do for an organization or company. It includes whatever base salary an employee receives, along with other types of payment that accrue during the course of their work, which related to production workers;
• $5,000 in rent for the company’s corporate office;
• $2,000 in marketing campaigns;
• $300 electricity bill related to the company’s production facility; and
• $20,000 in salaries related to the company’s accountants.

Of the items above, which are period costs that should be expensed in the period incurred?

Answer: $5,000 in rent for the company’s corporate office, $2,000 in marketing campaigns, and $20,000 in salaries related to the company’s accountants are period costs, as they do not relate to the manufacture of products. As such, the total amount of $27,000 should be expensed in the first year of operations.

Impact on the Income Statement

When period costs are expensed, they show up on the income statementIncome StatementThe Income Statement is one of a company's core financial statements that shows their profit and loss over a period of time. The profit or and reduce net income. Consider the following income statement:

As shown in the income statement above, salaries and benefits, rent and overhead, depreciation and amortization, and interest are all period costs that are expensed in the period incurred. On the other hand, costs of goods sold related to product costs are expensed on the income statement when the inventory is sold.

Related Readings

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