Understanding period costs
Period costs refer to expenses incurred periodically, differing from one-time expenses at the point of purchase or investment. Within financial modeling, they are commonly represented as a percentage of other measures, like revenue or assets. Examples of period costs encompass depreciation, amortization, and interest.
How to compute period costs
Calculating period costs involves identifying specific expenses occurring within a defined period. These could encompass labor, materials, and overhead costs. Allocating these costs appropriately can be achieved through direct or indirect methods. Direct methods allocate costs based on time or resource usage, while indirect methods allocate based on generated revenue. Once allocated, these costs are totaled to determine the overall period costs.
Distinguishing period costs from fixed costs
Period costs fluctuate with the level of production or activity, in contrast to fixed costs which remain constant regardless of production levels. For instance, raw material costs vary with production levels, classifying them as period costs, while office space rent remains fixed, qualifying as a fixed cost.
Illustrating a period cost
A period cost denotes an expense incurred at regular intervals, such as rent, utilities, or insurance premiums. Typically fixed, these costs remain constant from month to month and are vital considerations in budgeting and financial planning.