What are Period Costs?

Period prices are expenses that cannot be capitalized on a company’s balance sheetBalance SheetThe balance sheet is one of the 3 standard financial statements. The financial statements are essential to both financial modeling and accountancy.. In other words, they are expensed in the period incurred and also show up on the earnings statement. Period expenses are additionally called duration prices.

You are watching: Which of the following would most likely be a period cost?

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Understanding Period Costs

In managerial and expense accountancy, period expenses describe prices that are not tied to or pertained to the production of inventory. Instances encompass offering, general and also administrative (SG&A) expenses, marketing prices, CEO salary, and rent cost relating to a corpoprice office. The expenses are not regarded the manufacturing of inventory and also are therefore expensed in the period incurred. In brief, all costs that are not involved in the manufacturing of a product (product costs) are duration prices.

Period Costs vs. Product Costs

All expenses incurred by a firm are either period costs or product expenses. Additionally, the two kinds of costs are tape-recorded differently. See the table listed below for more comparison:

Product CostsPeriod Costs
Definition:Costs related to the manufacturing of a productCosts not pertained to the manufacturing of a product
Method of Recording:Capitalized on the balance sheet as inventory and also ultimately expensed to price of items offered on the earnings statementExpensed on the revenue statement in the period incurred
Examples:Direct labor, straight materials, and also manufacturing overheadMarketing cost, selling, general and governmental cost, and also CEO salary

To easily identify if a price is a period price or product expense, ask the question, “Is the cost straight or indirectly related to the manufacturing of products?” If the answer is no, then the cost is a period expense.

Example of Period Costs

The adhering to illustprices expenses incurred by a production agency in the first year of operations:

$10,000 in straight products concerned the production of a product;$5,000 in rent for the company’s corporate office;$2,000 in marketing campaigns;$300 electrical power bill pertained to the company’s production facility; and$20,000 in salaries concerned the company’s accountants.

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

Answer: $5,000 in rent for the company’s corpoprice office, $2,000 in marketing projects, and $20,000 in salaries concerned the company’s accountants are duration expenses, as they perform not relate to the manufacture of assets. Therefore, the complete amount of $27,000 must 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 reflects their profit and also loss over a period of time.The profit or and reduce net earnings. Consider the adhering to revenue statement:

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As displayed in the revenue statement over, salaries and also benefits, rent and also overhead, depreciation and amortization, and also interemainder are all period costs that are expensed in the period incurred. On the various other hand, costs of items marketed concerned product expenses are expensed on the earnings statement as soon as the inventory is marketed.

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Related Readings

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