What is Period costs are standard costs that businesses must add to their income statements. These costs are usually unavoidable business expenses, and may also be called period costs , time costs, capacity costs, and operating costs.
It’s important to learn how to report period costs to ensure you’re balancing your books correctly and effectively optimizing your budget for operations.
In this article, we give you a guide that defines period costs, lists their types, explains their importance, and gives you steps you can take to report period costs.
What is Period Cost?
Period costs are any costs incurred by a company that are not directly related to the production process.
This means they are not related to the cost of a single product or inventory cost for the business, therefore period costs are included in the company’s financial statements during the accounting period to which they are assigned.
You can divide period costs into two categories:
- Cost of sales
- Administrative costs
This is also known as selling, general and administrative expenses and also includes marketing and sales expenses along with corporate office and administrative expenses incurred by the business.
Types of Period Costs
Following are three classifications of period costs:
Current expenses: Expenses incurred by the company related to the current period.
Historical costs: Costs that have occurred in previous periods that should not be considered in decision making.
Predetermined expenses: Expenditures that the company estimates for the coming period that are calculated to prepare a budget that must be considered when making decisions.
General Period Costs
Here are some common types of period costs a business might have:
- Legal and professional fees: Lawyers, accountants and other advisors that may be paid by the business
- Office expenses: Expenses such as supplies, rent and other office related expenses
- Utilities: Water, electricity, gas and other utilities
- Advertising and promotions: Marketing costs such as advertising, social media ads, and other promotional items.
- Maintenance and repairs: Office maintenance and payment for damage to any equipment that requires repair.
- Travel, meals and entertainment: Expenses incurred during business trips
- Salary: The money companies pay their employees for their work.
- Employee benefits: Expenses such as retirement accounts, health insurance and other employee benefits.
- Insurance: Businesses typically have insurance costs to cover their assets.
- Loan interest and other obligations: Many businesses have to pay back loan interest every month.
- Automobile expenses: Any company vehicle not related to the manufacture or delivery of products.
Why is it Important to Calculate Period Costs?
Calculating your total period costs is important because it helps you estimate your business’s net income for each accounting period. This can be important for filing accurate business taxes. Knowing your total period costs also helps your business prepare for an audit.
How to Calculate and Create Period Cost Reports
There is no standard approach or formula that businesses and accountants use to calculate period costs. Most often, management accountants must look at business costs and determine which are period costs and which are production costs before they add them to the income statement. Once they are on the income statement, accountants can subtract them from gross profit to arrive at net income for the period.
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1. Monitor your period costs
Make sure you track how much money you spend on period costs and spend them during the period in which you incur the costs. You can keep key features of whatsapp numbers more than just messaging receipts, employee pay stubs, invoices, and other documents that reflect how much money you pay for various period costs .
2. Include your period costs on your income statement.
When you incur period costs , they end up on your income statement and reduce your net income. You may choose to separate period costs by category on your income statement to get a better understanding of your costs and how much you spend on each.
It helps you assess your expenses and gives you an accurate picture of your net income. Your income statement also includes the cost of goods sold, taxes, and total revenue for the accounting period.
3. Re-evaluate your period costs every year.
Many period costs are not fixed. When you set your budget each year, you can reduce expenses by reevaluating your period expenses. For example, if you phone number mx change your insurance premium or even switch to a company with a lower premium, the price difference is worth noting. Reevaluating your period costs can help you identify opportunities to reduce your expenses.
Case Example in Calculating Period Costs
Here is an example of calculating period costs on an income statement:
The table above shows an income statement with salaries and benefits, rent and overhead, interest and depreciation. These costs are examples of period costs that are accounted for in the table during the period in which they occur.
The period costs that the manufacturing company had to incur in the period incurred were $4,280 in rent for the office, $3,120 in marketing materials and $24,700 in salaries for the company’s accounting team. The rest of their costs were related to production, meaning they were not period costs. This means that the manufacturing company had to incur $32,100 in expenses for the first year they operated their manufacturing facility.
Conclusion
That’s a complete discussion of period costs, calculating and examples. To make it easier for you to calculate all costs that occur in the business, you can use such as Accurate Online which has the most complete features at the most affordable price.
Accurate Online is a cloud-based accounting software with more than 20 years of experience and has the best features such as bookkeeping, financial report automation, stock and asset management, multi-warehouse and branches, automatic transaction reconciliation process, and many more.
