July 5, 2020

SB-Accounting

Accounting + Finance Blog

Cost classification: Period cost

Cost classification: Period cost

Cost is an expense incurred for a particular item or event. Various cost classification had been explained in this blog. In this article, the period cost will be examined. We will define period cost, explain its main characteristics, and give examples.

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Meaning of period cost

Period cost is the cost incurred within a period of time and it is charged against profit in the profit or loss statement.

Period cost is also referred to as the cost charged within a timeframe that cannot be capitalized.

Key points to note

From the definition, the following key points applied to the period cost

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Period cost is charged against profit. This means that period cost or period expenses, as it is at times called, are those regular expenses charged against the operating profit of a business.

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Period cost is time base cost. This class of cost is within a period of time. Period costs may be charged monthly, quarterly, half a year, or annually. Most times, the way period cost is charged is based on the timeframe a business prepares its budgets and financial report.

Period costs are transferred to the profit or loss statement. At the close of an accounting period, the available period costs are transferred to the expense section of the statement of profit or loss.

Period costs cannot be capitalized. Costs are capitalized into inventory and other assets. Cost may also be capitalized as prepared or accrued expenses. For example, the cost of buying raw material is usually capitalized as inventory. But the period cost, for example, selling expenses can not be capitalized unless, if it can be separated as accrual or prepayment.

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Period costs cannot be found in a statement of financial position. Since this cost cannot be capitalized, it is not posted to the balance sheet.

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Examples of period costs

Selling and distribution expenses such as repairs of the motor can, depreciation of motor van, delivery man salary, salesman salary, repairs of the van, among others.

Administrative expenses such as the salary of the supervisor, managers commission, electricity bills, office rent, repairs of office generator, amount others.

Cost of capital, that is interest on the loan.

Period costs are necessary costs. These costs are mostly expenses. However, period costs should not be confused with product costs. This will be discussed next.

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