Period Cost

A period cost is a cost charged against the income of the period in which it is incurred, rather than attached to a unit of product and held in inventory until that unit is sold. Selling, general and administrative costs are the common cases, and those land below gross profit on the income statement instead of inside the inventory figure on the balance sheet. The classification turns on what a cost is attached to, not on how big it is or whether it moves with volume.

Where the Definition Comes From

One US statute defines the term outright. The term period costs means costs, other than product costs, that are expensed in the period in which they are incurred, such as selling expenses and general and administrative expenses (19 U.S.C. 4531(a)(25)(B)(ii)). That definition exists to serve one purpose, the total cost figure behind the USMCA rules of origin, so it is not a general accounting standard.

It is still worth reading, because it sorts a producer’s spending into three named buckets rather than two. Product costs are the costs associated with the production of a good, including the value of materials, direct labor costs, and direct overhead, and other costs are all costs recorded on the books of the producer that are not product costs or period costs, such as interest (19 U.S.C. 4531(a)(25)(B)(i) and (iii)).

On the books the same line is drawn by the inventory standard, which both names period charges outright and fixes what may not be carried in inventory. Unallocated overheads are recognized as an expense in the period in which they are incurred, and other items such as abnormal freight, handling costs, and amounts of wasted materials (spoilage) require treatment as current period charges rather than as a portion of the inventory cost. Selling expenses constitute no part of inventory costs, and under most circumstances general and administrative expenses should be included as period charges, except for the portion of such expenses that may be clearly related to production and thus constitute a part of inventory costs (Accounting Research Bulletin No. 43, Chapter 4, paragraph 5A, as amended by FASB Statement No. 151).

Period Cost and Product Cost

The separator is what a cost attaches to, and the timing follows from that. A product cost attaches to a unit of output and waits in inventory until that unit is sold, so the period that incurs it and the period that reports it are often not the same. A period cost has no unit to wait on, so the period that incurs it reports it. Direct materials, direct labor and the manufacturing overhead allocated to production make up the product side of the line, and the labor and overhead half of that is worked through in conversion cost; how overhead reaches units at all, and what happens to the part a rate fails to absorb, belongs to costing overheads.

Traceability is a separate axis and it does not decide this one. An indirect cost can still be a product cost, since factory overhead traces to no single unit and still attaches to units through an allocation, and the traceability test itself is set out in direct cost.

A Worked Example

Say a manufacturer runs one payroll in March covering two teams, sells none of March’s output that month, sells all of it in April, and absorbs the factory side into the units at its predetermined rate.

March payroll
  Factory supervision                        $30,000
  Sales salaries                             $30,000

March income statement
  Selling expense recognized                 $30,000
  Factory supervision recognized                  $0

March balance sheet
  Factory supervision held in inventory      $30,000

April income statement
  Factory supervision, inside cost of
  goods sold when the units are sold         $30,000

Two identical amounts, one payroll run, one month. The selling half reached income immediately because nothing held it. The factory half waited, because a unit carried it out of March and into the month it sold. Neither the size of the amount nor the timing of the cash decided that. Only what each amount attached to.

Where the Split Lands in a Firm’s Work

On the statement, the selling and administrative cases sit below gross profit, in the layout set out in multi-step income statement. Not every period charge arrives there, since overhead the allocation never absorbed is a factory cost the period must carry rather than a selling or administrative one. The reporting interval that makes a period a unit at all is the assumption described in periodicity.

In the close, the classification is settled when a cost is coded, not when the statements are drawn. A period cost wrongly capitalized leaves the period’s expense understated and the inventory figure overstated by the same amount, and that error does not stay put: it unwinds into cost of goods sold when those units sell, so a later period absorbs what an earlier one avoided. Coding is also where the judgment sits, since the standard’s exception for general and administrative expense turns on a portion being clearly related to production, and a portion is a matter of evidence rather than of account title.

For a client subject to the uniform capitalization rules, a cost the books charge to the period may still have to be capitalized for tax. The two regimes agree about selling, since selling expenses form no part of inventory cost on the books and selling and distribution costs are not required to be capitalized under section 263A (Treasury Regulation 1.263A-1(e)(3)(iii)(A)). The divergence sits in the general and administrative layer, and it is worked through in costing overheads. A workpaper that classifies once and uses the answer twice has answered only one of the two questions.

Common Questions

Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a trial task lets a firm’s own reviewer grade the classification work before any client file moves.