What Are Some Common Examples of Period Costs?

Period costs are expenses a business incurs that are not directly tied to the creation of goods or services but are necessary for overall business operation during a specific accounting period. They reflect the general overhead required to keep a business running, distinct from the costs involved in manufacturing a product.

Understanding Period Costs

Period costs are expensed in the accounting period in which they are incurred, regardless of when any products are sold. Their classification is based on the passage of time rather than the volume of production or sales activities. These costs are typically associated with administrative functions, selling efforts, and general business activities that support the overall operation of the entity. They do not become part of the cost of inventory held on the balance sheet.

This immediate expensing reflects their nature as costs that benefit the current period’s operations rather than future periods’ production. Unlike product costs, which attach to inventory and are expensed only when the inventory is sold, period costs are recognized as expenses in the period they are paid or accrued.

Key Examples of Period Costs

Selling expenses represent a common category of period costs, incurred specifically to generate revenue. Advertising costs, for instance, are expensed as incurred. Sales commissions, typically a percentage of sales ranging from 5% to 15%, are also period costs because they are paid to sales staff for securing customer orders, not for manufacturing the goods themselves. Salaries for marketing and sales department personnel are likewise classified as period costs, as these individuals support sales efforts rather than direct production.

Administrative expenses encompass the general costs of running a business that are not directly related to selling or manufacturing. This includes the salaries of executive staff, such as a CEO, human resources personnel, and accounting department employees. Rent for administrative offices is another common administrative period cost. Utilities for these offices, along with general office supplies, are also expensed in the period they are used. Legal and accounting fees for specialized services fall into this category as well, covering general business compliance and financial oversight.

Research and Development (R&D) costs are examples of period costs, representing investments in future products or processes. Under U.S. Generally Accepted Accounting Principles (GAAP), ASC 730, R&D costs are expensed as incurred. This is because the future economic benefits of R&D activities are often uncertain, and their direct link to specific revenue-generating products can be difficult to establish at the time the costs are incurred. This immediate expensing prevents companies from capitalizing costs that may not yield future benefits.

Interest expense, the cost of borrowing money, is also classified as a period cost. This financing cost arises from a company’s debt obligations and is not directly tied to the production of goods or services. For example, a business loan might carry an annual percentage rate (APR) between 5% and 15%, depending on the borrower’s creditworthiness and market conditions. The interest accrued on such loans is expensed in the period it relates to, reflecting the cost of using borrowed funds during that time.

How Period Costs Appear on Financial Statements

Period costs are primarily reported on a company’s income statement, which summarizes revenues and expenses over a specific accounting period. Unlike product costs, which are initially recorded as inventory on the balance sheet until the related goods are sold, period costs are expensed immediately. They are typically presented below the gross profit line, often grouped under categories such as “Selling, General, and Administrative (SG&A) Expenses.”

These costs are subtracted from gross profit to arrive at a company’s operating income, also known as earnings before interest and taxes (EBIT). This presentation highlights the expenses incurred to run the overall business, separate from the direct costs of producing goods. Their immediate expensing means they do not remain on the balance sheet as assets, directly impacting profitability in the period they occur.