Identifying Period Costs- A Comprehensive Guide to Differentiating Fixed and Variable Expenses_1
Which of the following are period costs?
In accounting, understanding the difference between product costs and period costs is crucial for accurate financial reporting and decision-making. Period costs are expenses that are not directly tied to the production of goods or services. Instead, they are incurred over a specific period and are expensed in the period in which they are incurred. This article will explore various types of costs and determine which ones fall under the category of period costs.
Period costs are typically associated with the general operation of a business, such as administrative and selling expenses. These costs are not included in the cost of goods sold (COGS) and are expensed on the income statement in the period they are incurred. Let’s examine some common examples of period costs:
1. Salaries of administrative staff: The salaries paid to administrative personnel, such as office managers, human resources staff, and other non-production employees, are considered period costs. These individuals do not directly contribute to the production process but are essential for the overall operation of the business.
2. Selling and marketing expenses: Costs associated with selling and marketing activities, such as advertising, promotional campaigns, and sales commissions, are period costs. These expenses are necessary for generating revenue but are not directly tied to the production of goods or services.
3. Depreciation: Depreciation is the allocation of the cost of an asset over its useful life. While depreciation is a non-cash expense, it is still considered a period cost. This is because it is not directly related to the production of goods or services but rather reflects the wear and tear of assets used in the business.
4. Rent and utilities: Expenses related to the rental of office space and utilities, such as electricity, water, and internet services, are period costs. These costs are necessary for the business to operate but are not directly tied to the production process.
5. Insurance: Premiums paid for insurance coverage, such as general liability, property, and workers’ compensation insurance, are considered period costs. These expenses are not directly related to the production of goods or services but are necessary for the protection of the business.
In conclusion, period costs are non-production expenses that are expensed in the period they are incurred. They include salaries of administrative staff, selling and marketing expenses, depreciation, rent and utilities, and insurance. Understanding the distinction between period costs and product costs is essential for accurate financial reporting and making informed business decisions.
