Period costs include all costs except direct costs incurred on the product. Such costs usually occur either after the manufacturing stage, or outside the factory. The two common examples of period costs are marketing and selling costs, and administrative costs.
Marketing & Selling Costs
Marketing and selling costs are the costs incurred by the company to secure orders and transfer the finished product or service to the customer.
The most conspicuous example of period costs is marketing expenses. While the costs incurred on advertisements of a certain product can trace back to the same type of products, it becomes impossible to assign the advertisement costs to all products in the inventory directly.
Another major example of period costs are costs for setting up and maintaining the product distribution system. This includes costs for the setting up of sales outlets, purchasing or hiring delivery vehicles, and appointment of sales agents in different areas.
Much of such costs are either one-off or recur periodically irrespective of whether any sales take place or not, or the quantum of sales during the period. Such costs find inclusion as period costs in the accounting books of the time.
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General Administrative Costs
General administrative costs, which include much of the staff activities of the company, remain disconnected to the actual production process, and strive to assist or facilitate the manufacturing process.
Common examples of general and administrative costs include:
- Salary of the CEO and other administrative staff
- Cost of staff functions such as human resources, finance, and other functions
- Employee training and organizational development costs, the benefits of which remain indirect and realized in the long term
- Costs of maintaining corporate offices and other facilities
- Expenses incurred in welfare activities such as community development as part of corporate social responsibility
- Depreciation of corporate office and facilities
Much of these costs remain fixed and time-bound and are difficult to assign to products.
Many modern cost accounting methods such as activity-based costing try to assign general administrative costs as direct costs by tracing the extent of utilization of such activities by the products during the manufacturing stage. Other managerial approaches try to integrate various supportive human resources activities with the line functions or core business activities and account them as such.
While such initiatives make for good management control and analysis, it is not an accepted accounting standard, and the Financial Accounting Standards Board (FASB) and Internal Revenue Service (IRS) do not accept activity based costing for externally published financial statements. Moreover, it is not realistically possible to convert some costs such as the CEO’s salary and training costs to direct costs.
Other examples of period costs include
- Costs incurred for research and development
- Capital loan repayment and interest
- Insurance premium payouts
- Taxes on property and rent
Such costs remain fixed independent of the production activities, and the benefits spread over a long term beyond the accounting year of the payment.
Considering period costs is a major factor when pricing products. In accounting, such costs report as selling, generating, and administrative (SG&A) expenses and interest expense in the accounting period in which they occur, and charge against the revenues during the same period to determine profits for the accounting period.