Period expenses help businesses earn income but aren’t part of the cost of goods sold.
Period expenses often include rent, utilities, insurance, and property taxes. Legal expenses and loan interest might be included if paid in advance.
An expenditure account holds a company’s expected payments for an accounting period, while a prepaid expense account holds its actual payments.
Why Should I Know About Period Costs?
Understanding how much a business spends on expenses helps owners and managers understand where their cash flows from operations come from and where they go when cash deficits occur.
Less period expenditures means more money for savings or business investments.
How Are Period Costs Calculated?
Add all planned payments for a period and deduct any early payments to compute period expenses.
The period’s expected expenses remain.
For instance, Company XYZ’s 2016 year-end income statement revealed $275,000 in period expenses.
Company XYZ projected to pay $150,000 in rent, utilities, insurance, and property taxes in Q4 2016.
They paid $100,000 in rent and utilities but only $10,000 in insurance and property taxes since a storm destroyed one property’s roof.
The remaining estimated costs are ($150,000 + $100,000 – $10,000). $160,000
Operating expenses are expected revenue-generating costs for enterprises.
Examples include product production supplies and salesperson compensation.
Operating expenses cannot always be identified by when payments are made or received during the accounting periods they influence.
This prevents them from being matched to cash flow sources or labeled as inflows or outflows.
Cost per period versus. product
Period costs differ from product costs. Product expenses are part of asset production or acquisition costs.
They are also used to calculate revenue when an asset is sold, which might effect future revenues and costs.
Period Costs to Watch
Some period costs are not disclosed in the financial statements but are monitored by management.
Utility bills and lawsuits are examples of non-business costs.
If these costs become excessive, they can add significantly to total expenses and should be regularly watched so management can cut them when possible.
Managers should cut or eliminate these costs:
Vendors offering lines of credit to firms may help them avoid paying invoices.
The cost of doing business in remote areas since it may be required to stay there even if not making money.
Paying bills from past decisions
Borrowing money for current charges that do not decrease future income or expenses
Reduce or eliminate these costs
Certain time expenditures may be too expensive to eliminate from a company’s operations.
In some circumstances, reducing previous payments is more realistic.
For instance, if your organization was paying $4000 a year on a particular sort of period expenditures and is now spending $8000, you must identify strategies to cut that expenditure or at least control the increase.
Here are several ways firms might plan ahead to minimize period expenses:
Diversity in management — A diverse team of decision-makers can notice difficulties before they become major issues.
Skills development — Decision-makers can spot problems before they spiral out of control with the correct skillsets.
Technology — Cutting-edge technology can help prevent these costs by providing improved visibility into the organization’s operations.
Management of inventory and supply chain A well-managed inventory will lower the company’s storage costs for non-profit items.
Continuous supplier communication – Businesses can detect rising period expenses by communicating with suppliers.
Asset Management – Good asset management may help businesses expand by matching spending to revenue.
Outsourcing non-core functions can lower period expenses for a corporation.
One last thought
Period Costs are accounting period costs that may or may not benefit subsequent periods.
Managers should regularly monitor these costs to reduce them wherever possible.
Diversifying decision-making teams, skill development, technology use, and supplier and stakeholder communication help businesses plan.
Managers always seek methods to save expenses and boost efficiency.
Period expenses can directly reduce costs and increase revenue, so keep them in mind while looking for ways to improve your firm.