What are duration Costs?

Period costs are expenses that cannot be capitalized on a company’s balance sheetBalance SheetThe balance sheet is among the three basic financial statements. The gaue won statements are crucial to both gaue won modeling and accounting.. In various other words, they room expensed in the duration incurred and appear on the income statement. Period costs are additionally called duration expenses.

You are watching: Which of the following would most likely be a period cost?

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Understanding period Costs

In managerial and also cost accounting, period costs to express to costs that space not tied to or regarded the manufacturing of inventory. Examples incorporate selling, general and administrative (SG&A) expenses, marketing expenses, CEO salary, and also rent expense relating come a corporate office. The prices are not related to the production of inventory and are as such expensed in the period incurred. In short, all costs that space not involved in the manufacturing of a product (product costs) are duration costs.

Period prices vs. Product Costs

All costs incurred by a agency are either duration costs or product costs. Additionally, the two species of costs are videotaped differently. Check out the table listed below for much more comparison:

Product CostsPeriod Costs
Definition:Costs regarded the manufacturing of a productCosts not concerned the production of a product
Method of Recording:Capitalized on the balance sheet as inventory and also eventually expensed to price of goods sold top top the revenue statementExpensed ~ above the revenue statement in the period incurred
Examples:Direct labor, direct materials, and also manufacturing overheadMarketing expense, selling, general and also administrative expense, and CEO salary

To conveniently identify if a price is a duration cost or product cost, ask the question, “Is the expense directly or indirectly concerned the production of products?” If the answer is no, climate the cost is a period cost.

Example of duration Costs

The following illustrates prices incurred by a manufacturing agency in the first year of operations:

$10,000 in straight materials related to the manufacturing of a product;$5,000 in rent for the company’s corporate office;$2,000 in marketing campaigns;$300 power bill concerned the company’s manufacturing facility; and$20,000 in salaries concerned the company’s accountants.

Of the items above, i m sorry are duration costs that should be expensed in the period incurred?

Answer: $5,000 in rent for the company’s this firm office, $2,000 in marketing campaigns, and also $20,000 in salaries regarded the company’s accountants are period costs, as they do not relate come the to produce of products. Together such, the full amount that $27,000 have to be expensed in the very first year that operations.

Impact ~ above the earnings Statement

When period costs space expensed, they show up on the revenue statementIncome StatementThe earnings Statement is among a company"s core financial explanation that shows their profit and also loss end a period of time.The benefit or and reduce net income. Consider the following income statement:

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As displayed in the earnings statement above, salaries and also benefits, rent and also overhead, depreciation and also amortization, and also interest are all period costs that are expensed in the period incurred. Top top the various other hand, costs of items sold pertained to product prices are expensed ~ above the income statement when the perform is sold.

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