Period Costs

Period costs are costs for activities other than the actual production of the product. Period costs are expensed as they are incurred.

The number of period costs is almost unlimited because period costs include essentially everything other than the product costs, since all costs must be either product costs or period costs. The more commonly used examples of period costs include selling, administration, and accounting, but period costs are all the costs of any department that is not involved in production.

Period costs ⇒ can be variable, fixed or mixed, but they are not included in the calculation of cost of goods sold or cost of goods manufactured .

For financial reporting purposes, period costs are expensed to the income statement as they are incurred.

However, for internal decision–making, some period costs may be allocated to the production departments and then to the individual units. This allocation may be done internally so that the company can set a price for each product that covers all the costs the company incurs.

Overhead allocation of period costs to production is not reported as such in the external financial statements issued by the company, because it is not proper to do so according to U.S. GAAP or IFRS.

According to both U.S. GAAP and IFRS, period costs should be expensed in the period in which they are incurred. Allocation of period costs to production would be used for internal decision-making purposes only.

The number of classifications of period expenses that a company uses on its income statement will depend
on the company. Examples include general and administrative expense, selling expense, accounting, depreciation of administrative facilities, and so on.