Finance Basics: Period Costs (B)
What are period costs? What are fixed and variable costs?
Posted: Apr 2009
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Period costs are expenses incurred every period to run the business.
They are not related to the sales amount.
A period cost:
• is a cost item on the profit & loss statement.
• appears as a cash outflow on the cash flow statement of the period in which it is actually paid.
The cost can be fixed or variable. Fixed cost are unchanged by the business activity ( office rent, utilities ). Variable costs are relative to the volume of business activity ( volume produced & sold ).
JS's friend asked him for his sales stand, since he is having some plans. .
Therefore JS decided to rent the sales stand for the amount of $10 per day in cash.
Still, JS orders four boxes of sandwiches from fast food (and doesn't forget to pay them for yesterday's supplies) and sets out to earn enough to pay sales stand as well.
He continues to credit his customers.
• A cost which is an expense of the period and is paid in cash appears on both the profit & loss and the cash flow statements of that period.
• A period fixed cost is not related to the level of activity (for example, the sales level).
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