How to Calculate the Total Period Cost

Period costs represent expenses that businesses incur and record on their financial statements within the same accounting period they arise. These costs are not directly associated with the production of goods or services.

Understanding Period Costs

Period costs are expenditures that are not tied to the manufacturing of products but are expensed in the period they occur. These costs are recognized immediately on the income statement, meaning they do not attach to inventory. They are considered operating expenses necessary for a business to function, even if no products are made or sold.

Selling expenses constitute one category of period costs, encompassing all expenditures related to marketing, selling, and delivering products. Examples include advertising campaigns, sales staff salaries and commissions, and the costs associated with shipping finished goods to customers.

Administrative expenses form another broad category of period costs. These involve the general overhead costs of running a business that are not directly related to selling or manufacturing. Common examples include office rent, salaries for administrative personnel like human resources or accounting staff, utility bills for office spaces, and depreciation on office equipment. Legal and audit fees also fall under administrative expenses.

Differentiating Period Costs from Product Costs

Product costs, also known as inventoriable costs, are expenses directly tied to the creation of goods. These include direct materials, direct labor, and manufacturing overhead. Unlike period costs, product costs are initially recorded as assets on the balance sheet as part of inventory.

Direct materials are the raw goods that become part of the finished product, such as lumber for furniture. Direct labor refers to the wages paid to employees who physically convert raw materials into finished goods. Manufacturing overhead encompasses all other indirect costs incurred in the factory, like factory utilities, factory rent, and depreciation on manufacturing equipment.

Product costs remain part of inventory until the goods are sold. Only when a product is sold do its associated product costs move from the balance sheet to the income statement as Cost of Goods Sold. This accounting treatment contrasts sharply with period costs, which are expensed immediately in the period they are incurred, regardless of when products are sold. This difference in timing and classification is crucial for proper financial statement presentation and tax implications.

Calculating Total Period Cost

Calculating the total period cost involves identifying and summing all expenses that fit the definition of a period cost within a specific accounting period. Businesses typically begin this process by reviewing their financial records, primarily the income statement and the detailed general ledger accounts. The income statement often presents expenses categorized, which can streamline the identification of selling and administrative costs.

To accurately identify relevant period costs, businesses examine individual expense accounts in the general ledger. For instance, an account labeled “Marketing Expense” or “Office Rent” would clearly indicate a period cost. Conversely, accounts like “Raw Materials Inventory” or “Wages – Factory” would be excluded, as they represent product costs.

Once all individual period costs are identified, the next step is to sum them. This involves adding up all the selling expenses, administrative expenses, and any other general operating expenses that are not tied to manufacturing. For example, if a company incurred $15,000 in advertising, $10,000 in sales salaries, $5,000 in office rent, and $8,000 in administrative salaries during a month, the total period cost for that month would be $38,000. This straightforward summation provides a clear figure for the total operational costs expensed in the period.