How to Calculate Total Period Cost in Managerial Accounting
In managerial accounting, understanding the concept of total period cost is crucial for accurately assessing and managing expenses that are not directly tied to the production of goods or services.
By differentiating between period costs and product costs, businesses can gain valuable insights into their overall financial performance.
In this article, we will delve into the definition of total period cost and explore various components that contribute to it.
What is Total Period Cost?
Total period cost refers to the sum of all expenses incurred by a company during a specific accounting period that are not directly associated with the production of goods or services.
These costs are essential for maintaining regular business operations, generating sales, and managing administrative tasks.
Unlike product costs, which are directly attributed to the manufacturing process, period costs are expensed in the period in which they are incurred.
Components of Total Period Cost
1. Selling Expenses
Selling expenses include costs related to advertising, marketing campaigns, sales commissions, distribution, and customer service. These expenses are necessary to promote and sell products or services to customers.
2. Administrative Expenses
Administrative expenses comprise costs associated with general management, administration, and support functions within a company. Examples include salaries of executives and administrative staff, office supplies, utilities, and legal fees.
3. Research and Development (R&D) Expenses
R&D expenses involve costs incurred in the pursuit of new products, technologies, or process improvements. These expenses are vital for businesses aiming to innovate and maintain a competitive edge in the market.
4. General Overhead Expenses
General overhead expenses encompass various costs that cannot be directly attributed to a specific department or function. They include rent, insurance, depreciation of office equipment, utilities, and other miscellaneous expenses necessary for day-to-day operations.
FAQs
Are period costs fixed or variable?
Period costs can be both fixed and variable. For example, administrative salaries are generally fixed costs, while advertising expenses may vary depending on the marketing strategy and budget allocated.
How are period costs different from product costs?
Period costs are expensed during the accounting period in which they are incurred and are not directly associated with the production process. In contrast, product costs are incurred to create goods or services and are allocated to inventory until the products are sold.
Why is it important to track total period costs?
Tracking total period costs helps businesses determine the true cost of their products and services, assess profitability, make informed pricing decisions, and identify areas for cost reduction or efficiency improvement.
Can period costs be capitalized as assets?
No, period costs cannot be capitalized as assets since they do not provide future economic benefits. They are expensed in the period in which they are incurred.
