Question

A manufacturing company prepays its insurance coverage for a three-year period. The premium for the three years is $2,790 and is paid at the beginning of the first year. Seventy percent of the premium applies to manufacturing operations and thirty percent applies to selling and administrative activities. What amounts should be considered product and period costs respectively for the first year of coverage

Answer 1

Product cost (Manufacturing cost) = $651

Period Cost (Selling and administrative cost)= $279

Step-by-step explanation:

Calculation for What amounts should be considered product and period costs respectively for the first year of coverage

First step is to calculate the Total Insurance expense for the year

Total Insurance expense for the year = $2,790 / 3 year

Total Insurance expense for the year = $930

Now let calculate for the Product cost (Manufacturing cost) and Period Cost (Selling and administrative cost)

Product cost (Manufacturing cost) = $930 * 70% Product cost (Manufacturing cost) = $651

Period Cost (Selling and administrative cost) = $930*30%

Period Cost (Selling and administrative cost)= $279

Therefore the amounts that should be considered for product and period costs respectively for the first year of coverage are:

Product cost (Manufacturing cost) = $651

Period Cost (Selling and administrative cost)= $279