Period costs, also referred to as nonmanufacturing costs, are expenses that a business incurs to maintain its operations but are not directly associated with the manufacturing process.
These costs are not directly tied to the production of goods or services, but rather to the overall operation of the company. Examples of period costs may include rent, salaries and wages of administrative staff, office supplies, marketing and advertising expenses, and other similar expenses. While these costs are necessary for the overall functioning of the business, they do not directly contribute to the production of goods or services.
Elements of Non-Manufacturing Costs
There are two components to nonmanufacturing expenditures: marketing charges and administrative costs. Costs associated with acquiring consumer orders and delivering finished products to customers. These include advertising, sales commissions, shipping charges, and facility occupancy fees for marketing departments. Administrative costs include executive and clerical salaries, the cost of legal, financial, data processing, and accounting services, and building space for administrative workers.
For accounting purposes, nonmanufacturing costs are expensed periodically (typically in the period they are incurred). However, for management objectives, managers frequently require the assignment of nonmanufacturing costs to goods. This is especially true for specific product-related commissions and promotions.
For instance, managers of consumer goods companies such as Procter & Gamble and Anheuser-Busch prefer to allocate the high expense of advertising to a certain product. This distinction between manufacturing and non-manufacturing costs is artificial for most of our purposes, as we are more concerned with the costs that products and services impose on the organisation than with the accounting treatment of these costs.
Sometimes it is difficult to discern between manufacturing and non-manufacturing costs. For instance, are the salaries of accountants who manage factory payrolls considered manufacturing or non-manufacturing expenses? What about the office rent for the vice president of manufacturing? There are no clear classifications for some of these charges. Therefore, businesses typically establish and adhere to their own criteria.
Some Examples of Non-manufacturing Costs
Selling Expenses: 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. Examples of selling expenses include advertising and promotion costs, sales commissions, shipping and handling fees, customer support expenses, travel and entertainment costs, product demonstration costs, and marketing research expenses.
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.
General and administrative expenses: Examples include accounting, human resources, legal, executive, and information technology personnel and support personnel. General and administrative costs would also include the depreciation of office equipment and buildings associated with these functions. General and administrative expenses are commonly referred to as administrative expenses.
It is not always easy to distinguish between manufacturing and non-manufacturing costs. For instance, if the legal department works on a production-related issue and the human resources department hires assembly line workers, are the associated costs manufacturing or non-manufacturing expenditures? It is up to each business to select how to account for such costs when determining product pricing. Managerial accounting has the benefit over financial accounting in that costs can be arranged in any way that facilitates managerial decision-making.