Question

Some costs (rent, insurance, supervisory salaries, etc.) might be classified as either period or MOH costs. How does the cost accountant accurately and ethically decide how to classify these costs?

Answer 1

The cost accountant decides how to classify costs as period or MOH costs by analyzing their nature, considering their behavior, evaluating their allocation, and applying ethical standards.

Step-by-step explanation:

The cost accountant determines how to classify costs as either period or MOH costs based on their nature and usage in the production process. Here are the steps they follow:

1. Analyze the cost: The cost accountant examines the nature of the cost and its relationship to the production process. For example, rent and insurance are typically period costs because they are incurred regardless of the level of production.
2. Consider the cost behavior: The cost accountant looks at how the cost behaves in relation to production. If the cost varies with the level of production, it is more likely to be classified as a manufacturing overhead (MOH) cost. For example, supervisory salaries may vary with the number of units produced.
3. Evaluate the cost allocation: The cost accountant assesses whether the cost should be allocated to the products or treated as a period cost. They consider the cause-and-effect relationship between the cost and the products. If the cost directly relates to the production process, it may be allocated to the products as a MOH cost. Otherwise, it is classified as a period cost.
4. Apply ethical standards: The cost accountant ensures that the classification aligns with ethical principles, such as transparency and accuracy. They should not misrepresent the costs to manipulate financial statements.