Period Cost
Costs that are expensed in the period they are incurred rather than being capitalized into inventory, including selling, general, and administrative expenses.
What is Period Cost?
Period costs are all costs that are not included in product costs and therefore cannot be capitalized into inventory. Instead, they are recognized as expenses on the income statement in the period they are incurred, regardless of the level of production or sales. Period costs primarily include selling expenses (such as advertising and sales commissions), general and administrative expenses (such as executive salaries and office rent), and interest expense. Unlike product costs — which flow through inventory and are only expensed when the product is sold — period costs reduce income immediately when incurred, making them important for understanding a company's operating expense structure.
Example
A manufacturer incurs $500,000 in factory overhead and direct labor (product costs, capitalized in inventory) and $200,000 in advertising and $150,000 in executive salaries (period costs, expensed immediately). Even if the company produces 10,000 units but sells only 8,000, the full $350,000 in period costs appears on the income statement for the period.
Source: FASB ASC 330 — Inventory