Period costs guide decisions about how to efficiently rule your small business realm to stay afloat, impacting staffing, advertising, and day-to-day operations. When we talk about product costs, we’re diving into the nitty-gritty of how much it takes to make the things a business sells. So, in the financial statements, it’s a key player in the Cost of Goods Sold (COGS) section on the income statement. People often confuse product and period costs due to the complexity of accounting terminology and the different ways these costs are treated in financial reporting.

These terms play a part in determining the cost of goods sold (COGS) and overall profitability. Today, we’re breaking down these two concepts to understand their general aspects, relationship with financial statements, and overall impact on business decision-making. Period expenses are usually calculated by adding together all expected payments for a period, then subtracting any amounts that were paid early.


We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. You’ll also be able to spot trouble spots or overspending in administrative areas or if overhead has ballooned in recent months. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Console ltd is planning for expansion in upcoming years, and for the same, they need to purchase machinery costing $54 million.

  • Rent expense refers to the cost incurred by a company for leasing commercial properties to conduct its business operations.
  • The rent expense is recorded on the income statement each month whether 1,000 units or 10,000 units are manufactured.
  • Depreciation represents the loss in value of fixed assets like machinery and equipment as they wear down over time.
  • In contrast, product costs are expensed as products are sold, not when the business purchases them.
  • It means that DM and DL increase as production increases, and they decrease if production decreases as well.

Starbucks acknowledges it is entered into some variable lease costs such as including a percentage of gross sales in excess of specified levels as part of the cost of rent. Starbucks also notes in its annual report that its leases “often include options to extend or terminate at our sole discretion.” In a triple net lease, the tenant assumes responsibility for paying not only the base rent but also all or a portion of the property’s operating expenses. These expenses may include property taxes, property insurance, and common area maintenance charges. A retailer that wants to set up in a prime area with heavy foot traffic will have to pay higher rent expenses than for a secondary location.

Overview of Managerial Accounting in Cost Classification

On the other hand, the administrative assistant’s salary is a period cost since she works in the office and not on the production floor. Finally, both executives’ salaries are period costs since they also do not work on the production floor. turbotax deluxe online customer ratings and product reviews Other examples of period costs include marketing expenses, rent (not directly tied to a production facility), office depreciation, and indirect labor. Also, interest expense on a company’s debt would be classified as a period cost.

Examples of Rental Payment Period in a sentence

The period costs could not be capitalized as they are not directly related to the production of the inventory and hence are charged in the profit and loss statement of the company. Rent expense for the manufacturing facility is not a period cost since it is related to product manufacturing. In conclusion, understanding the difference between period costs and product costs is crucial for accurate financial reporting. Recognizing and properly recording these costs is essential for evaluating a company’s financial performance and making informed business decisions. Period costs are a vital aspect of accounting and financial reporting, providing valuable insights into a company’s operating expenses and overall financial performance.

Fixed and Variable Costs in Product Pricing

In a gross lease, the tenant pays a fixed amount of rent, and the landlord is responsible for covering all property expenses, including property taxes, insurance, and maintenance costs. Tenants prefer gross leases because monthly rent expense is usually lower, consistent, and easy to understand. When you differentiate period costs from others, you’re breaking down your expenses to provide insights about where your money is going. From there, you can make decisions that will make your business more profitable.

What Is A Period Cost In Accounting

On the income statement, period costs are recognized and expensed in the period they are incurred. This means that they directly reduce the net income reported by the company. By expensing period costs as they are incurred, the income statement provides a comprehensive view of the company’s financial performance during a specific period. Product and period costs take part in the financial story, influencing the bottom line and revealing the business’s financial health. When you look at a business’s income statement or a balance sheet, product and period costs show up there, influencing different parts of these financial statements. Manufacturing companies typically spend low amounts in rent expense as a percentage of total expenses.

Other companies include fringe benefit costs in overhead if they can be traced to the product only with great difficulty and effort. For a retailer, the product costs would include the supplies purchased from a supplier and any other costs involved in bringing their goods to market. Period costs are expensed in the period they are incurred, reducing net income on the income statement. They are recorded differently from product costs, which are capitalized on the balance sheet as inventory and eventually expensed when the inventory is sold. Total period costs include any expenses that are not directly related to product manufacturing.

Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. Because period costs immediately impact net income, managing them helps businesses increase profitability. Alternatively, the costs of wood, fabric, nails and other materials that physically go into building a chair are product costs. Only when the finished chair is sold does the product cost hit the income statement through cost of goods sold.