Period Costs

Period costs are all costs in the income statement other than cost of goods sold. Period costs, such as design costs, marketing, distribution, and customer service costs, are treated as expenses of the accounting period in which they are incurred because managers expect these costs to increase revenues in only that period and not in future periods. For manufacturing-sector companies, all nonmanufacturing costs in the income statement are period costs. For merchandising-sector companies, all costs in the income statement not related to the cost of goods purchased for resale are period costs. Examples of these period costs are labor costs of sales-floor personnel and advertising costs. Because there are no inventoriable costs for service-sector companies, all costs in their income statements are period costs.

An interesting question pertains to the treatment of R&D expenses as period costs.^* As we saw in Chapter 1, for many companies in industries ranging from machine tools to consumer electronics to telecommunications to pharmaceuticals and biotechnology, innovation is increasingly becoming a key driver of success. The benefits of these innovations and R&D investments will, in most cases, only impact revenues in some future periods. So should R&D expenses still be considered period costs and be matched against revenues of the current period? Yes, because it is highly uncertain whether these innovations will be successful and result in future revenues. Even if the innovations are successful, it is very difficult to determine which future period the innovations will benefit. Some managers believe that treating R&D expenses as period costs dampens innovation because it reduces current period income.

Exhibit 2-5 showed examples of inventoriable costs in direct/indirect and variable/fixed cost classifications for a car manufacturer. Exhibit 2-6 shows examples of period costs in direct/indirect and variable/fixed cost classifications at a bank.