Question

Suppose that you have been given a summer job as an intern at Issac Aircams, a company that manufactures sophisticated spy cameras for remote-controlled military reconnaissance aircraft. The company, which is privately owned, has approached a bank for a loan to help finance its growth. The bank requires financial statements before approving the loan.

Required:
Classify each cost listed below as either a product cost or a period cost for the purpose of preparing financial statements for the bank.

1. Depreciation on salespersonsâ cars.
2. Rent on equipment used in the factory.
3. Lubricants used for machine maintenance.
4. Salaries of personnel who work in the finished goods warehouse.
5. Soap and paper towels used by factory workers at the end of a shift.
6. Factory supervisorsâ salaries.
7. Heat, water, and power consumed in the factory.
8. Materials used for boxing products for shipment overseas. (Units are not normally boxed.)
9. Advertising costs.
10. Workersâ compensation insurance for factory employees.
11. Depreciation on chairs and tables in the factory lunchroom.
12. The wages of the receptionist in the administrative offices.
13. Cost of leasing the corporate jet used by the companyâs executives.
14. The cost of renting rooms at a Florida resort for the annual sales conference.
15. The cost of packaging the companyâs product.

Answer 1

Product cost are cost incurred in the manufacturing of a product while period cost are cost incurred for a period irrespective of the manufacturing activity.

1. Depreciation on salespersons cars.

Classification: Period cost

2. Rent on equipment used in the factory.

Classification: Product cost

3. Lubricants used for machine maintenance.

Classification: Product cost

4. Salaries of personnel who work in the finished goods warehouse.

Classification: Period cost

5. Soap and paper towels used by factory workers at the end of a shift.

Classification: Product cost

6. Factory supervisors salaries.

Classification: Product cost

7. Heat, water, and power consumed in the factory.

Classification: Product cost

8. Materials used for boxing products for shipment overseas. (Units are not normally boxed.)

Classification: Period cost

9. Advertising costs.

Classification: Period cost

10. Workers compensation insurance for factory employees.

Classification: Product cost

11. Depreciation on chairs and tables in the factory lunchroom.

Classification: Product cost

12. The wages of the receptionist in the administrative offices.

Classification: Period cost

13. Cost of leasing the corporate jet used by the company as executives.

Classification: Period cost

14. The cost of renting rooms at a Florida resort for the annual sales conference.

Classification: Period cost

15. The cost of packaging the company as product.

Classification: Product cost