Period costs are those expenses that a company incurs which are not directly linked to the production of goods or services. These costs simply occur when time passes, and they’re more related to the period of time itself rather than specific business operations. Examples include rent, general administrative expenses, and salaries of employees not involved in production.
1. Can you give more examples of period costs?
Yes, examples of period costs aside from rent, administrative expenses, and non-production salaries include insurance, advertising expenses, office supplies, and the depreciation of office equipment and buildings used for administration rather than production.
2. How are period costs treated in accounting?
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Period costs are always expensed in the period they occur. They are not included in product costs or inventory, and are typically reported as operating expenses on the income statement.
3. How do period costs differ from product costs?
Unlike period costs, product costs are directly tied to the production of goods or services. They consist of direct materials, direct labor, and manufacturing overhead. These costs are included in inventory until the product is sold.
4. Can period costs affect a company’s profitability?
Yes, period costs can affect profitability as they’re deducted from the company’s revenue. If period costs rise without an increase in revenue, it could cause a decrease in a company’s net income.
5. Are period costs considered overhead?
Yes, period costs are considered a type of overhead cost as they don’t directly contribute to the creation of products or services but are necessary for running the company.