Is rent expense a period cost or a product cost?

Definition of Rent Expense

Rent expense is often a monthly amount paid by a company for use of a building. Typically, the rent is due on the first day of every month that the building is occupied.

Definition of a Period Cost

A period cost is a cost that is used up or expires in the accounting period. As a result, the cost is reported as an expense on the income statement.

Definition of a Product Cost

A product cost is a cost that is either directly or indirectly assigned to the goods that are produced or manufactured by the company. Product costs are the raw materials, labor, and manufacturing overhead used to produce the goods. Think of product costs as clinging to the goods produced. The rent associated with the manufacturing operations is part of manufacturing overhead, which is allocated to the products manufactured. As a result, the allocated manufacturing cost will be included as part of the following costs:

  • Cost of goods that are in inventory (a current asset on the balance sheet)
  • Cost of goods that were sold (as the expense cost of goods sold on the income statement)

Examples of Rent as a Period Expense

If a company's monthly rent is for use of assets involved in its selling function (rent for office space, equipment, autos, etc.) or its administrative function of the company, the rent is a period cost and will be expensed in the period when the expense is incurred. These rents are not allocated to products for its external financial statements.

Example of Rent as a Product Cost

If a manufacturer rents its manufacturing facilities and equipment, the rent is a product cost (as opposed to an expense of the period). That is, the rents will be included in the manufacturing overhead which is allocated to the goods produced. (Think of the manufacturing rents as clinging to the goods produced.) As a result, the manufacturing rents will be part of the products that are in inventory and will be part of the cost of the products sold. When the items in inventory are sold, the manufacturing rent allocated to those products will be expensed as part of the cost of goods sold.