Period cost
A period cost is an expense charged to the income statement in the period it is incurred, rather than attached to a product and carried until that product is sold. Selling and administrative expenses are the usual examples, which is where sales commission traditionally sat before the contract-cost guidance changed the answer for some of it.
Accounting splits costs by where they attach. A product cost follows the goods: raw materials, factory labour, the overhead absorbed into a unit, all of it sitting in inventory on the balance sheet until the unit is sold, at which point it becomes cost of goods sold. A period cost attaches to nothing and to nobody. Rent, the finance team's salaries, marketing, and the sales function's own running costs are charged against the period they happened in and are gone. The distinction is about timing, and it decides which month's profit a given dollar reduces.
Sales commission is the interesting case, because it sat comfortably in the period bucket for decades and then partially moved. Under ASC 340-40, the cost guidance that travels with ASC 606, a commission paid because a contract was won is an incremental cost of obtaining that contract, and it is capitalised as an asset and amortised across the period the contract benefits. What did not move: a commission on a short contract where the practical expedient applies, a sales manager's salary, and anything paid for reasons other than winning the deal. So a single pay run can contain one commission that hits the current month in full and another that touches it for a fraction. Which treatment applies to which payment is a judgement about the period of benefit, and that call belongs to whoever signs the accounts rather than to the system that calculated the payout.
Two commissions in one March pay run
March payroll carries two commission payments. One is on a month-to-month subscription, where finance applies the under-one-year expedient. The other is on a 36-month contract that is capitalised and amortised straight-line.
- Commission on the month-to-month deal, paid March
- $2,000
- Expensed in March as a period cost
- $2,000
- Commission on the 36-month contract, paid March
- $18,000
- Capitalised, then amortised over 36 months
- $500 a month
- March charge from the capitalised commission
- $500
- Cash out in March, against March expense
- $20,000 against $2,500
Both reps were paid in full on the same day. The $17,500 difference is an asset on the balance sheet, and it unwinds across the following 35 months.
- Is sales commission a period cost or a product cost?
- It is never a product cost, because commission does not attach to inventory. Historically it was a period cost, expensed when incurred. Under current US guidance, an incremental commission paid to obtain a contract is capitalised and amortised over the period of benefit, which takes it out of the period-cost treatment even though it stays a selling expense. Short contracts can often still be expensed immediately under a practical expedient.
- What is the difference between a period cost and a product cost?
- A product cost is absorbed into the value of inventory and stays on the balance sheet until the item is sold, at which point it is recognised as cost of goods sold. A period cost is charged to the income statement in the period it is incurred, regardless of what was sold. Rent, administrative salaries and marketing are period costs; factory labour and materials are product costs.
Nearby terms
Knowing the word is
the easy half
Commish pays period cost the way your plan describes it, shows the arithmetic on every line, and traces each payment back to the deal that earned it.