Period cost means:

Question

Period cost means:

Accepted Answer

The correct option is 2:
The term **Period cost** refers to all costs in a business that are not considered Product Costs. These are typically the selling and administrative expenses, which are charged to the income statement in the period in which they are incurred, regardless of when the goods are sold. Crucially, in relation to the volume of production, a significant portion of selling and administrative expenses are generally **Fixed Costs** (e.g., office salaries, rent, depreciation of office equipment, advertising budget). While not all fixed costs are period costs, Fixed Costs are the best fit among the options because they are time-based expenses, unlike variable production costs which are inventoried with the product.

The incorrect option is 1:
**Variable Cost** represents costs that change in total directly with the level of production or activity, such as direct materials and direct labour. In a manufacturing environment, the variable costs of production are categorized as **product costs** or inventoriable costs. This means they are attached to the inventory and treated as assets until the finished goods are sold, at which point they become Cost of Goods Sold. Therefore, they are not expensed simply by the passage of a period, making them distinct from period costs.

The incorrect option is 3:
**Prime Cost** is defined as the direct manufacturing costs: the sum of Direct Material and Direct Labour. Since these costs are directly traceable to the creation of the product, they are fundamental components of **product cost**. Like all product costs, they are first capitalized as part of inventory and are only matched as an expense (Cost of Goods Sold) to the revenue from the sale of the goods, which is fundamentally different from the nature of a period cost.

The incorrect option is 4:
**Marginal Cost** is the cost of producing one extra unit of a product. This cost includes only the variable costs of production (direct materials, direct labour, and variable overhead) for that unit. Since marginal cost is a per-unit **product cost** that directly relates to manufacturing volume, it is inventoried as part of the finished goods. This characteristic places it firmly in the category of product costs, which stands in contrast to period costs that are tied to time rather than production.