A product cost is incurred during the manufacture of a product, while a period cost is usually incurred over a period of time, irrespective of any manufacturing activity. Product CostsĮvery cost incurred by a business can be classified as either a period cost or a product cost. If the entire use to which a cost can be put is consumed in the current accounting period (such as rent or utilities) it is probably a period cost, whereas if its use is linked to a product or is spread over multiple periods, it is probably not a period cost. Finally, costs included in fixed assets, such as purchased assets and capitalized interest, are not considered to be period costs. Also, costs included in inventory, such as direct labor, direct materials, and manufacturing overhead, are not classified as period costs. Items that are not period costs are those costs included in prepaid expenses, such as prepaid rent. The preceding list of period costs should make it clear that most of the administrative costs of a business can be considered period costs. Interest expense (that is not capitalized into a fixed asset) Examples of Period CostsĮxecutive and administrative salaries and benefits Instead, it is typically included within the selling and administrative expenses section of the income statement. This type of cost is not included within the cost of goods sold on the income statement. A period cost is charged to expense in the period incurred. Since a period cost is essentially always charged to expense at once, it may more appropriately be called a period expense. A period cost is more closely associated with the passage of time than with a transactional event. A period cost is any cost that cannot be capitalized into prepaid expenses, inventory, or fixed assets.
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