Period costs (alternatively referred to as nonmanufacturing costs) are expenses incurred to maintain business operations but are not required or vital to the manufacturing process. They are matched to a specific time period’s revenues rather than being included in the cost of goods sold.
Elements of Non-Manufacturing Costs
Nonmanufacturing costs have two elements: marketing costs and administrative costs. Marketing costs are the costs required to obtain customer orders and provide customers with finished products. These include advertising, sales commissions, shipping costs, and marketing departments’ building occupancy costs. Administrative costs are the costs
required to manage the organization and provide staff support, including executive and clerical salaries; costs for legal, financial, data processing, and accounting services; and building space for administrative personnel.
Nonmanufacturing costs are expensed periodically (often in the period they are incurred) for financial accounting purposes. For managerial purposes, however, managers often want to see nonmanufacturing costs assigned to products. This is particularly true for commissions and advertising related to a specific product. For example, managers
at consumer products companies such as Procter & Gamble and Anheuser-Busch want the cost of advertising a specific product, which can be substantial, to be assigned to that product. For most of our purposes, this distinction between manufacturing and nonmanufacturing costs is artificial because we are interested in the costs that products and services impose on the firm, not in the financial accounting treatment of these costs.
Sometimes distinguishing between manufacturing costs and nonmanufacturing costs is difficult. For example, are the salaries of accountants who handle factory payrolls manufacturing or nonmanufacturing costs? What about the rent for offices for the manufacturing vice president? There are no clear-cut classifications for some of these costs, so companies usually set their own guidelines and follow them consistently.
Some Examples of Non-manufacturing Costs
- Paying wages to production line workers is an obvious example of a manufacturing expense.
- Salaries paid to salespeople are a marketing cost, not a product cost; marketing expenditures are classified as period costs, which means they are directly charged to the period’s expense account.
- While depreciation on manufacturing equipment is considered a manufacturing cost, depreciation on the warehouse in which products are held after they are made is considered a period cost.
- While carrying raw materials and partially completed products is a manufacturing cost, delivering finished products from the warehouse to clients is a period expense.