Viewing financial statements can be complicated and difficult for many people. If you also have a similar problem, then you would love to read this article, because we are about to explain, where would period costs be found on the financial statements.
Before we do that, we believe many of our readers wouldn’t have an idea about what period costs are. This is why, we will explain about period costs first, and then we will get on to where would period costs be found on the financial statements.
What is period cost?
The period costs, also known as period expenses refer to non-capitalized costs on the balance sheet. In short, these expenses are incurred during a time period.
To better understand the period cost, remember one thing, any cost that is not related to the production of inventory is a period cost. The period costs include SG and A expenses, CEO salary, marketing expenses, rent for the corporate office, etc. These costs are not related to product costs, that is why it is expensed in the period incurred.
Well, as of now, you would be confused between the two terms, period and product cost. Don’t confuse, the difference between the two is easy to identify.
The period costs are costs that a business incurs for expenses that are not related to inventory production. On the contrary, product costs are expenses that the business incurs for manufacturing the product. Period cost is expensed on the income statement in the period incurred, whereas the product cost is capitalized as inventory on the balance sheet, and as cost of goods sold on the income statement.
The best example of period costs is administrative and general expenses. Whereas product costs include direct labor cost, material cost, manufacturing cost, etc.
Tip: If you want to know if the cost mentioned on your income statement is a period cost or product cost, ask yourself a question: if the expense you are referring to is either directly or indirectly related to the cost spent on the production of the product. If your answer to this question is ‘no,’ then it is a period cost. However, if the answer is yes, then it is product cost.
As of now, you have fully understood the difference between product and period costs. Let’s see how it appears on the income statement and where you can find these.
Where would a period cost be found on the financial statements?
When you’ll look at the financial statement, all the costs that are mentioned before the total gross profit are referred to as product costs. The gross profit is the cost of goods sold subtracted from the generated revenue.
Below the gross profit, you’ll see a list of expenses such as salaries and benefits, rent and overhead, depreciation and amortization, and more. These expenses are referred to as period costs. When you subtract all your expenses from the gross profit, you get your total earnings before tax. When you subtract the applicable tax amount from the sum, you get your net earnings.
If you still have questions regarding period costs, then have a look at the most frequently asked questions and answers to clear up your doubts.
FAQs regarding Period costs
- Is depreciation a period cost?
There is a tricky answer to this. If you take into account the depreciation of production equipment, then it would be considered as production cost. However, if you are referring to depreciation on the warehouse, then it would be considered as period cost.
- Will you include prepaid expenses in the period cost?
The prepaid expenses such as rent are not included in the period cost. However, if the rent was postpaid then it will be considered as a period cost.
- What costs does include period cost?
Any cost that is linked with product manufacturing will not be a period cost. Moreover, purchased assets and capitalized interest are also not part of period costs.
- Why is period cost important?
The period cost is important because it relates to expenses that are not related to the production of the products. The period cost plays a vital role in running your business. Moreover, this cost incurs as monthly expense, and it stays stable, whether or not your business is doing well.
- Are fixed costs and period costs the same?
A fixed cost does not change with the increase and decrease in production. The rent you pay for a corporate office, which would not change up until the next contract, is a good example of a fixed cost expense.