Period Costs Definition, Example, Impact on Income Statement

They have already been incurred or spent and are separate from current decision-making processes. Accurately calculating product costs also assists with more in-depth analysis, such as per-unit cost. Per-unit cost is calculated by dividing your costs by the number of units produced.

• Period costs and product costs are two categories of costs for a company that are incurred in producing and selling their product or service.
• The company will incur these expenses even if the services are stopped.
• However, rent expense for the office is since production does not take place in the office.
• Their administrative costs are from executive salaries and professional costs.

Easily traceable costs are product costs, but some product costs require allocation since they can’t be traced. Otherwise, costs that can’t be traced or allocated to products and services are classified as period costs or costs that are attributed to the period in which they were incurred. Both product costs and period costs directly affect your balance sheet and income statement, but they are handled in different ways.

How to Calculate Period Costs?

In short, any costs incurred in the process of acquiring or manufacturing a product are considered product costs. When costs are traceable to products and services, they are undeniably product costs. Being traceable means that you won’t have a hard time determining the physical quantity and its cost equivalent. These costs are identified as being either direct materials, direct labor, or factory overheads, and they are traceable or assignable to products. Costs and expenses that are capitalized, related to fixed assets, related to purchase of goods, or any other capitalized interest are not period costs. The product costs are the costs incurred by a company directly related to the production of goods.

The period costs could not be capitalized as they are not directly related to the production of the inventory and hence are charged in the profit and loss statement of the company. The management of the period cost helps the company to prepare better budgeting and able the entity to use the increased profit in expanding the business through which the entity will yield more profit. Looking at these expenses the utilities for the manufacturing facility and the production worker’s wages are both product costs because these are manufacturing overhead costs and direct labor costs. Utilities for the retail shop as well as the cashier’s wages are period costs.

Period Cost vs Product Cost

This can be particularly important for small business owners, who have less room for error. If product and period costs are overstated or understated, or not recorded at all, your financial statements will examples of period costs be wrong as well. On the other hand, period costs are considered indirect costs or overhead costs, and while they play an important role in your business, they are not directly tied to production levels.