Costs that cannot be capitalized on a company’s balance sheet Show
What are Period Costs?Period costs are costs that cannot be capitalized on a company’s balance sheet. 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 CostsIn 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 CostsAll 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:
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 CostsThe following illustrates costs incurred by a manufacturing company in the first year of operations:
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 StatementWhen period costs are expensed, they show up on the income statement 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 ReadingsThank you for reading CFI’s guide to Period Costs. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:
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JOIN OUR NEXT SERIES Financial Leadership Workshop THE ART OF THE CFO® Financial Leadership Workshop Are selling and administrative costs product costs?These expenses are not considered to be product costs and are not allocated to items in inventory or to cost of goods sold. Instead these expenses are reported on the income statement of the period in which they occur. These expenses are sometimes referred to as operating expenses.
Is selling expense considered a product cost?Selling expenses are categorized as indirect expenses on a company's income statement because they do not contribute directly to the making of a product or delivery of a service.
Is selling expense a period cost?Examples of period costs are as follows: Selling expenses. Advertising expenses. Travel and entertainment expenses.
Does product cost include administrative?Sales commissions, administrative costs, advertising and rent of office space are all period costs. These costs are not included as part of the cost of either purchased or manufactured goods, but are recorded as expenses on the income statement in the period they are incurred.
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