Period cost is a financial term used to describe expenses that are not directly related to producing a product or service. The spelling of this word is /ˈpɪərɪəd kɒst/, with the emphasis on the first syllable. The first part, "period," is spelled with an "i" but is pronounced as "ee," while "cost" is spelled and pronounced as it is. This term is important in accounting as it helps distinguish between costs that are incurred during the production process and those that are not.
Period cost refers to the expenses that are not directly associated with the production of goods or services and are incurred over a specific period, typically a financial reporting period, such as a month, quarter, or fiscal year. These costs are necessary for the regular operation of a business, but they do not contribute to the creation of products or services.
Period costs are generally expensed on the income statement when incurred and are not recorded as assets on the balance sheet. They are often referred to as operating expenses or overhead costs. Examples of period costs include rent, salaries, utilities, insurance, advertising, and office supplies.
Unlike product costs, which are directly attributable to the production of goods or services and are recorded as part of inventory until the products are sold, period costs are immediately recognized as expenses. They are essential for the day-to-day operations of a company and cannot be directly linked to the production process or a specific unit of output.
Period costs are important for managerial decision-making, as they are used in calculating the total cost of production and determining the profitability of a business. By analyzing period costs and comparing them to the revenue generated, managers can assess the financial performance of the company and make informed decisions regarding pricing, cost control, and resource allocation.
The term "period cost" comes from the field of accounting and refers to costs that are not directly tied to the production or acquisition of goods or services. These costs are usually associated with a specific accounting period and are expensed on the income statement rather than being capitalized on the balance sheet.
The word "period" in this context refers to a specific time frame or accounting period, such as a month, quarter, or year. It helps to differentiate these costs from the costs that are directly related to the production process.
The term "cost" simply refers to the amount of money or resources required to produce or acquire something. In the case of period costs, they include expenses such as administrative salaries, advertising and marketing costs, rent, utilities, and other overhead expenses that are not directly tied to the manufacturing process.