Period Costs

Period costs are all the costs that are not included in product costs. These costs are expensed on the profit and loss account in the period in which they are incurred, using the usual rules of accrual accounting you have already learned in financial accounting. Period costs are not included as part of the cost of either purchased or manufactured goods. Sales commissions and office rent are good examples of the kind of costs we are talking about. Neither commissions nor office rent are included as part of the cost of purchased or manufactured goods. Rather, both items are treated as expenses on the profit and loss account in the period in which they are incurred. Thus, they are said to be period costs.

As suggested above, all selling and administrative expenses are considered to be period costs. Therefore, advertising, executive salaries, sales commissions, public relations, and other nonmanufacturing costs discussed earlier would all be period costs. They will appear on the profit and loss account as expenses in the period in which they are incurred.

Quite frequently, it is necessary to predict how a certain cost will behave in response to a change in activity. For example, a manager may want to estimate the impact a 5 per cent increase in long-distance calls would have on the company’s total electricity bill or on the total wages the company pays its long-distance operators. Cost behavioral means how a cost will react or respond to changes in the level of business activity. As the activity level rises and falls, a particular cost may rise and fall as well – or it may remain constant. For planning purposes, a manager must be able to anticipate which of these will happen; and if a cost can be expected to change, the manager must know by how much it will change. To help make such distinctions, costs are often categorized as variable or fixed.