Sometimes referred to as a period expense, a period cost is any type of expense that is related to a specific time frame or period rather than the actual volume of product sales generated. Typically, this includes any selling as well as general administrative expenses that are incurred during that time frame which are charged against the generated or collected revenue for that same period. Often, a period cost is accounted for in the same manner as a fixed expense, even if the amount of a recurring cost will change during an upcoming period.
Assessing the period cost associated with a given time frame is important to any type of business effort. Doing so makes it possible to quickly determine if the revenue generated or collected during a given time frame is sufficient to manage the costs of operating the business in a way that minimizes dipping into reserve funds or incurring late fees or charges on past due debts. When the period cost is sufficiently higher than the actual receipts of revenue, this can mean that the business needs to rethink its invoicing strategies, or make some changes in how it structures outstanding debt.
Many companies tend to relate the period cost to collected revenue rather than the revenue generated during that same time frame. This is because revenue that is generated during the period may or may not actually be realized within that time frame. For example, a customer may place a sizable order on the first day of a calendar month, but not remit payment for that order until sometime the following month. If the period under consideration is a calendar month, that generated revenue does not help to offset costs since it is not actually received or collected until the following month.
By evaluating the period cost, businesses can often identify if their current operational practices are actually moving the company toward its goals, or if there is a need to make some adjustments in the way the business operates. For example, an unfavorable amount of period cost could mean that the company needs to make some changes in the way it manages the production process or orders raw materials, or possibly even in how it funds the efforts of the sales department. Monitoring the period cost makes it possible to arrange finances so that the usual cash flow is sufficient to keep the company stable and capable of continuing to operate at a profit in the future. Many companies will assess period cost on at least a monthly basis, a strategy that can often make it possible to manage expenses and income before a small issue can have an adverse impact on the overall operation.
