Definition: Period costs are expenses that are easier to attribute to times and accounting periods than actual production processes or finished goods.
What Does Period Cost Mean?
Typically, managerial accountant want to classify expenses in categories that can improve operations. Manufactures tend to focus on functional classifications. In other words, they classify costs by how they function. The two main function groups are period costs and product costs. Period costs do not relate steps in the manufacturing process. Instead, these expenses are attributed to selling and general administrative activities.
A few good examples of period costs are advertising and administrative salaries. Advertising expenses can’t really be allocated to a specific manufacturing process or even a product. Advertising costs are easier to attribute to a time period for instance the advertising budget for the current year. Other general and administrative costs like office salaries can’t be allocated to products. Instead, a time period is more appropriate.
Product costs, on the other hand, are expenses that are incurred to manufacture a good and can typically be traced back to a specific product. In other words, product costs are the expenses incurred to produce something. Raw materials and workers’ wages are good examples of product costs.
Period costs are expensed on the income statement when they are incurred. Take advertising expenses for example. When a company spends money on an advertising campaign, it debits advertising expense and credits cash. These costs are directly expenses and reported on the income statement.
Product costs, on the other hand, are capitalized as inventory on the balance sheet. Raw materials are not expensed when they are purchased. Manufacturers debit their raw materials inventory account when the purchase is made and credit their cash account. These capitalized assets show up on the balance sheet.
The distinction between these two costs is reported on the manufacturers statement.