Question

"A manufacturing company prepays its insurance coverage for a three-year period. The premium for the three years is $3,120 and is paid at the beginning of the first year. Ninety percent of the premium applies to manufacturing operations and ten percent applies to selling and administrative activities. What amounts should be considered product and period costs respectively for the first year of coverage?

ProductPeriod
A)$3,120 $0
B)$2,808 $312
C)$1,872 $208
D)$936 $104"

Answer 1

Step-by-step explanation:

The premium for the three years is $3,120, and it is paid at the beginning of the first year. We need to determine the amounts that should be considered product and period costs for the first year of coverage.

Ninety percent of the premium applies to manufacturing operations, and ten percent applies to selling and administrative activities.

To find the product costs for the first year, we need to calculate 90% of the premium.

90% of $3,120 = $2,808

Therefore, $2,808 should be considered product costs for the first year.

To find the period costs for the first year, we need to calculate 10% of the premium.

10% of $3,120 = $312

Therefore, $312 should be considered period costs for the first year.

So, the correct answer is:

B) $2,808 for product costs and $312 for period costs.

Answer 2

For the first year, the product costs for the manufacturing company are $936, and the period costs are $104, as the prepaid insurance premium is allocated according to the respective activities' percentages over the three-year coverage period.

Step-by-step explanation:

The question revolves around the allocation of a prepaid insurance premium for a manufacturing company between product costs and period costs. The total premium is $3,120 and is prepaid at the beginning of the first year, covering a three-year period. According to the question, 90% of the premium applies to manufacturing operations (product costs), and 10% applies to selling and administrative activities (period costs).

To determine the costs for the first year, we divide the total premium by the coverage period (3 years) and then allocate the resulting annual amount according to the specified percentages. Calculation: ($3,120 / 3 years) = $1,040 per year. Product costs for the first year: 90% of $1,040 = $936. Period costs for the first year: 10% of $1,040 = $104. Therefore, the correct answer is Option D: Product costs are $936, and period costs are $104 for the first year.