Period Cost Examples

Examples of Period Cost

The different examples of the period costs include all those costs that the company incurs in an accounting period but are not assigned with any of the particular products that are produced by the company like selling expenses, marketing expenses, administrative expenses, etc.

A period cost can be termed as any cost which cannot categorize into prepaid expenses, fixed assets, or inventory, and rather than being a transactional event, this cost is more closely linked with time. Since this cost is mostly charged as an expense all at once, it is appropriate to term it period expense.

Top 4 Industry Examples of Period Cost

Period Cost Examples

Example #1

One of the fastest emerging online gaming application Dream11 has been aggressively advertising, whether it be on television or mobile application third party application. It is estimated that the online gaming channel has been paying as good as 100 crores, and it usually spends more during Indian premier league matches every year. Discuss whether the same includes in the period cost in books of accounts of Dream11?

Solution

Period cost is those costs that are not incurred directly with the product or are not directly responsible for product manufacturing. The advertisement cost here appears not to be part of the online gaming application. Further, it is also stated that these incur during Indian premier league matches, which occur every year, and hence they are incurred periodically. Therefore, based on the above agreements, we can conclude that these advertisement costs should be treated as a period cost and not product cost.

Example #2

Console ltd is planning for expansion for upcoming years, and for the same, they need to purchase machinery costing $54 million. But they are lacking funds at the moment and also their stock price has touched 52 week low. They have hired a financial advisor who shall advise them on how to proceed upon the same that is getting funds and also not impacting their stock price much.

The financial advisor advises them to take a loan from a recognized financial institution as they would charge a lower rate of interest. It was estimated that a rate of 10% would be required to pay $5.4 million annually (simple interest rule) and which they can capitalize in the initial year. Then in upcoming years, they need to take the interest expense to profit and loss statement.

You are required to discuss whether both capitalize, and income statement expenses would be considered as a period expense?

Solution

Period cost is those cost which is not related directly to the manufacturing process or with the product cost and incurred periodically. Now, here the situation is of interest cost, which is not associated with the manufacturing process or with product cost, and they incur periodic wise.

As per the accounting standards, when a company purchases fixed assets, they are required to record the same as the initial cost. This cost would include all the costs necessary to bring the fixed asset in the presence. Since the loan was borrowed specifically for the fixed asset; hence the first-year interest cost will be capitalized with fixed assets. The remaining year’s interest cost will be shown as an expense in the income statement.

Since that cost is included in the fixed asset, which occurs just once, it would not be considered as a period cost. However, the cost, which will be an expense in the future, will be recognized as a period expense.

Example #3

Google Inc. is a well-renowned and a dream company for employees to work as they provide many amenities to their employees who don’t feel like they are working over there. From social activities to sports activities, from libraries to restrooms, etc., all are provided. Because of this, the productivity of employees boost up very much, and it displays through their work performance. Google Inc. is a little perplexed at the moment with regards to the travel and entertainment expenses as they incurred a lot on the employees; they want to know whether these are product costs as they boost up employee’s productivity or period cost, which incur periodic wise?

Solution

As per the vignette, it appears that the travel and entertainment expenses boost up employee morale and support, which in turn improves work performance and which also increases their product quality. For an expense to categorize as a period expense, it should be incurred periodically and should not be related to the product. The main product of Google is to act as a search engine, and no doubt, employees are the main head behind that. Still, the travel and entertainment are no way directly related to the product cost, and since they are incurred periodic, they must be assigned as a periodic expense.

Example #4

Following is the profit and loss statement of ABC Ltd, you are required to compute period expenses.

 Period Cost Example 1

Solution

Period cost is those which are incurred periodic and are not related to product cost or manufacturing cost. However, all the expenses are not related to product cost except for the cost of goods sold. But either criterion that periodic expenses are not fulfilled by Loss on sale of the asset since that incur only once and the second one is prepaid rent, which from the name it states that it has paid before time. Hence, while taking a total of the period expense, we will exclude them.

Period Cost Example 1.1png

Conclusion

A period costs are charged to the income statement in the period in which they incur. This cost is excluded from the cost of goods sold, which is reported in the top line of the income statement. These expenses attribute to general administrative and selling expenses.

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This article has been a guide to Period Cost examples. Here we discuss the top 4 practical industry examples of period cost along with a detailed explanation. You can learn more about financing from the following articles –

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