Period Cost Examples

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

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 company’s particular products, like selling expenses, marketing expenses, administrative expenses, etc.

A period costPeriod CostPeriod cost refers to all those costs which are not related or tied with the production process of the company i.e., they are not assigned with any of the particular product of the company and are thus shown in the financial statement of the company for the accounting period in which they are incurred.read more can be termed as any cost that cannot be categorized into prepaid expenses, fixed assets, or inventory. 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 a period expense.

Top 4 Industry Examples of Period Cost

Period Cost Examples

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Example #1

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

Solution

Period costs are not incurred directly with the product or are not directly responsible for product manufacturing. For example, the advertisement cost here is not part of the online gaming application. Further, it is also stated that these occur during Indian premier league matches 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 period costs, not product costs.

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Example #2

Console ltd is planning for expansion in upcoming years, and for the same, they need to purchase machinery costing $54 million. But they are lacking funds now, and their stock price has touched a 52 week low. So they have hired a financial advisor who shall advise them on how to proceed upon the same that is getting funds and 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 interest rate. It was estimated that a rate of 10% would be required to pay $5.4 million annually (simple interest rule) and which they could capitalize on in the initial year. Then in upcoming years, they need to take the interest expenseInterest ExpenseInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.read more 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 not related directly to the manufacturing process or product cost and is incurred periodically. Now, the situation is of interest cost, which is not associated with the manufacturing process or product cost, and they incur periodically.

As per the accounting standards, when a company purchases fixed assets, it must record the same as the initial cost. This 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. Therefore, the remaining year’s interest cost will be shown as an expense in the income statementThe Income StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more.

Since that cost is included in the fixed assetThe Fixed AssetFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more, which occurs just once, it would not be considered 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 at as they provide many amenities to their employees who don’t feel like they are working over there. All are provided from social activities to sports activities, from libraries to restrooms, etc. Because of this, employees’ productivity boosts up very much, and it displays in their work performance. However, Google Inc. is a little perplexed regarding the travel and entertainment expenses as they incur 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, the travel and entertainment expenses boost employee morale and support, which improves work performance and increases product quality. For an expense to categorize as a period expense, it should be incurred periodically and not 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 not directly related to the product cost, and since they are incurred periodically, 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. HowePeriod cost is those which are incurred periodically and are not related to product cost or manufacturing cost. However, all the expenses are not related to product costProduct CostProduct cost refers to all those costs which are incurred by the company in order to create the product of the company or deliver the services to the customers and the same is shown in the financial statement of the company for the period in which they become the part of the cost of the goods that are sold by the company.read more  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 of costs is charged to the income statement in the period they incur. This cost is excluded from the cost of goods sold, which is reported in the top line of the income statement. Instead, these expenses are attributed to general administrative and selling expensesGeneral Administrative And Selling ExpensesSelling, general and administrative (SG&A) expense includes all the expenses incurred in the selling of the products of the company whether direct or indirect along with the entire general and the administrative expenses during an accounting period under consideration such as advertisement expenses, sales promotion expenses, marketing salaries, etc.read more.

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