Financial modelling terms explained

Period Costs

Period costs are expenses that are not directly tied to the production of goods or services. They are expenses that are needed to keep the business running, but which do not generate value for the company

What Are Period Costs?

Period costs are those costs that are incurred on a periodic basis, as opposed to those costs that are incurred once, at the time of purchase or investment. In the context of financial modelling, period costs are typically expressed as a percentage of some other measure, such as revenue or assets. Common period costs include depreciation, amortization, and interest.

How Do You Calculate Period Costs?

In order to calculate period costs, one must first identify the specific costs that are incurred during a particular period. This may include costs such as labour costs, materials costs, and overhead costs. Once the specific costs are identified, they must be allocated to the appropriate period. This can be done using either a direct or an indirect allocation method. Direct allocation methods allocate costs based on the amount of time or resources that are used during the period. Indirect allocation methods allocate costs based on the amount of revenue that is generated during the period. Once the costs have been allocated, they can be summed to get the total period costs.

What Is the Difference Between Period Costs and Fixed Costs?

The main difference between period costs and fixed costs is that period costs are costs that vary with the level of production or activity, while fixed costs are costs that do not vary with the level of production or activity. For example, the cost of raw materials that a company purchases will be a period cost, as it will vary with the level of production. Rent on a company's office space will be a fixed cost, as it will not vary with the level of production.

What is An Example of a Period Cost?

A period cost is a cost that is incurred on a periodic basis. This type of cost can include things such as rent, utilities, or insurance premiums. In most cases, these costs are fixed and do not change from month to month. As a result, they need to be taken into account when creating a budget or financial plan.

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