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June 9, 2022 Hiring the right accountant When I meet a business owner operating at a successful $10 million in revenue, they often mention, “My CPA”… I immediately know that CEO/Entrepreneur is referring to their Tax CPA. That is because one thing that all Entrepreneurs
have in common is that they must file a tax return. So, from Read More » September 24, 2021 See also:Quick Ratio AnalysisPrice to Book Value AnalysisPrice Earnings Growth Ratio
AnalysisTime Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when Read More » CPA’s are SpecializedJune 8, 2021 The Difference in CPAs Looking back at my career I don’t know how many times I have introduced myself to someone and they ask, “Are you a CPA?” and I say yes. Then they tell me “you must be very busy with tax season” and I look at them with a bit of awe and Read More »
JOIN OUR NEXT SERIES Financial Leadership Workshop THE ART OF THE CFO® Financial Leadership Workshop Definition of Period CostsPeriod costs are the costs or expense incurred for the organization but does not directly relate to any of the activities which are related to the production of the inventory and thus are charged in the income statement or profit & loss statement of the entity for the period in which the cost was incurred i.e., selling & administrative expenses etc. ExplanationPeriod costs are basically the expenses which could be charged to income statement of the company for the period in which such expenses have been incurred. These expenses are not directly related to the production of inventory and thus does not form part of the cost of goods sold and are charged in the income statement of the company. These costs does not constitute to production of inventory and hence these costs can never be capitalized and always form part of the income statement of the company. Examples of these costs are Selling cost, overhead costs, advertisement costs etc. How to Calculate Period Costs?There is no specific method or formula for calculation of period costs. For calculating the period costs the management could track the records of period costs and identify those costs which are charged in the statement of profit & loss and are not directly related to production of inventories. This way the management could identify the expenses that could be classified as period costs and it will become easy to evaluate and compare the same figure with the figure in the previous years. Examples of Period CostsFor understanding the concept better, let’s take an example: Example #1A manufacturing company ABC Inc. records some of the expenditures incurred in the month of June 2020 & through the evaluation of the same the company wants to determine the total period costs incurred in the month of June 2020. The records of the expenditures are as follows:
Solution: Calculation of Period Cost-
The expenses that are compiled for the calculation of Period costs are not related Other expenses will not be considered as a period cost because they are directly related to the process of production of inventory. Types of Period CostsPeriod costs could be classified into three categories & the categories are as follows:
Importance of Period CostsPeriod Costs play a vital role in the running of the business. Some of the importance of period costs are as follows:
Advantages of Period CostsThe study & evaluation of the period costs proves advantageous to the management of the company in the following ways:
ConclusionPeriod cost is as vital as the product cost incurred by the entity. The period costs could not be capitalized as they are not directly related to the production of the inventory and hence are charged in the profit and loss statement of the company. The better management of the period costs helps the entity to identify the expenses and the areas of expenses where the same service or better services and results could be obtained through less expenditure to the company. The management of the period cost helps the company to prepare better budgeting and able the entity to use the increased profit in expanding the business through which the entity will yield more profit. Recommended ArticlesThis is a guide to Period Costs. Here we also discuss the definition and how to calculate period costs? along with the importance and advantages. You may also have a look at the following articles to learn more –
What are period costs?Period costs are all costs not included in product costs. Period costs are not directly tied to the production process. Overhead or sales, general, and administrative (SG&A) costs are considered period costs.
What is period cost and product cost?Product cost comprises of direct materials, direct labour and direct overheads. Period costs are based on time and mainly includes selling and administration costs like salary, rent etc. These two type of costs are significant in cost accounting, that most people don't understand easily.
What is period cost Mcq?A period cost is any cost that cannot be capitalized into prepaid expenses, inventory, or fixed assets.
Which of the following costs are expensed in the period in which they are incurred?Period costs are always expensed on the income statement during the period in which they are incurred. In sum, product costs are inventoried on the balance sheet before being expensed on the income statement. Period costs are just expensed on the income statement.
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