Is Sales Commission a Period Cost? Everything You Need to Know

Ask a finance manager how important it is to categorize your expenses under the right category. 

Whether it is a product cost, period cost, fixed cost, or variable cost.  

Put an expense under the wrong column and your profit margin might drop, your expenses appear inflated, budget inaccuracies start to arise and your financial report becomes misleading.  

Especially with expenses like sales commission, it can be a bit confusing where to classify it. 

Is it a cost incurred for selling the product? Or is it a cost part of the daily operational expense? Should it be recorded on paper when the client finalizes a deal or when they actually start using the product? 

This goes on to show how crucial it is to know exactly how to properly categorize your expenses.

But before you begin categorizing your expenses, you need to know what each cost means. Where each expense goes and how these determinations are done. 

In this article, we will define what product and period costs are. Under which costs does sales commission come under? And what factors determine sales commission classification.   

Let's begin.

What are Product Costs?

Product costs are expenses directly incurred for manufacturing or acquiring a product. 

Until the product is sold, these costs are recorded as inventory in the balance sheet. Upon selling the product, it is made cost of goods sold (COGS) in the income statement. 

Costs that come under production cost include:

• The cost of the raw material used for manufacturing the product.
  
  • Wood in the furniture industry.
  • Steel in car production.
  • Fabric in the cloth manufacturing. 

• The wages of the workers directly involved in manufacturing.
  
  • Wages of assembly line workers.
  • Salary of machine operators.
  • Benefits for production staff. 

• Indirect costs and manufacturing overhead.
  
  • Factory rent and utilities.
  • Maintenance and repair of production machinery.
  • Indirect supplies like lubricant and cleaning supplies. 
  • Indirect labor costs like janitor or quality control personnel. 

These costs are manufacturing expenses that are part of the inventory until the goods are sold.

What are Period Costs?

Period costs are expenses that are not directly tied to the production of goods. 

They are SG&A (Selling, General & Administrative) expenses that occur at regular periods of time. 

For this reason, they are also called period expenses. This means it is recorded as expenses in the income statement in the period in which they occur. 

Costs that come under period costs include:

• Costs related to selling the product. 
  
  • Costs for marketing and advertisement purposes. 
  • Sales commissions.
  • Shipping cost of products. 

• Expenses for administrative purposes.
  
  • Corporate office rent and utilities.
  • Salaries for office staff and executives. 
  • Costs for office furniture and other equipment.  

• Other general expenses. 
  
  • Recruitment and training costs.
  • Expenses for insurance purposes.
  • Charges for subscriptions and memberships. 

These costs are incurred at regular periods and are recorded as expenses in the income sheet. 

Is sales commission a period cost?

Yes. sales commissions very much come under period costs for these reasons. 

1. They are not directly related to manufacturing work. 
2. They come under selling, general, and administrative expenses. 
3. Sales commission expenses are incurred within regular periods. 
4. They do not become part of the inventory cost and are not added as part of the product.

These basic characteristics in the way sales commission is recognized in the balance sheet ensures that it is indeed a period cost. 

But let us look at it briefly to understand why sales commission should be considered a period cost.

Why Sales Commission Should Be Considered a Period Cost

A simple straightforward answer to this question is sales commission is considered period cost as it is related to sales function rather than production. 

But let's elaborate more. 

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1. Not Part of Production

Sales commissions are incurred after a product is manufactured. More specifically when the product is sold. This makes it unrelated to the manufacturing charges or inventory. 

2. Matched with Revenue

According to the matching principle, expenses should be recorded in the same period when the revenue is generated. Sales commissions are incurred as a direct result of revenue generation. So it is recognized as an expense in the same period as the revenue is recorded.

3. Expensed in the Period Incurred

Sales commissions are selling expenses. Hence they are recorded as expenses on the income statement at the time of the sale just like rent, utilities, or admin salaries.

4. Classified Under Selling Expenses

Since sales commissions are classified as selling expenses, it comes under the broader category of period costs. This expense supports the selling and admin functions and not manufacturing. 

To conclude, sales commissions do not contribute to inventory creation. It is directly tied to revenue generation and thus is recorded under period cost for accurate financial reporting. 

Factors That Determine If Sales Commission is a Period Cost

Still, confused as to how sales commission comes under period cost.

Let us look into more factors that give us clarity that sales commission is determined as period cost:

1. Timing of the Expense

Sales commission is an expense that is incurred after the production process or inventory creation. Its timing aligns with point of sale and revenue recognition.  

2. Purpose of the Expense

The purpose of sales commission expense is to support selling activities. It has nothing to do with the manufacturing process. This simple difference qualifies it for period cost. 

3. Accounting Standards

U.S. GAAP and IFRS standards require expenses to be recognized with the revenue generation. Commissions are recognized as expenses in the period of the sale and not when the product is manufactured. 

4. Expense Category

Sales commissions are part of the SG&A (Selling, General & Administrative) expenses. These are always considered period costs during financial reporting. 

5. Not Capitalizable

Sales commissions are not capitalized into inventory in the balance sheet. This means they do not affect the cost of goods sold directly. 

It is clear from these factors that sales commission must definitely be recorded under period cost in the financial statement. 

Conclusion

Now if you feel stressed out about this whole sales commission recognition process, then here is a solution. 

Kennect. 

We automate commission calculations based on real-time sales data. This ensures that your commissions are recorded in the correct accounting period and are in line with the matching principle.

Kennect removes manual tracking that causes delays or misclassifications. This way you have clean, compliant entries under period costs.

With detailed logs of calculations and payouts, Kennect offers clear documentation for audits and financial reporting that are compliant with ASC 606.

Kennect ensures that commission rules like tiers, splits, clawbacks are centrally managed which helps in standardizing the treatment of commissions as period costs across teams or regions.

In short, Kennect makes your financial reporting easy, accurate and hassle-free. So don't waste time, Book A Demo with us.