Question

abc manufactures and sells products. on average, warranty costs are 1% of total sales. during 2016, the company's first year of operations, total sales were $750,000 and actual warranty costs were $6,000. what is the total warranty expense that abc should recognize for 2016?

Answer 1

ABC Manufacturing should recognize a total warranty expense of $7,500 for 2016, which is 1% of its total sales for the year, despite the actual warranty costs being $6,000.

Step-by-step explanation:

The total warranty expense that ABC Manufacturing should recognize for 2016 is determined by the expected warranty costs as a percentage of total sales. Given that the average warranty cost is 1% of total sales, we calculate the expected warranty expense by taking 1% of $750,000, which equals $7,500. Although the actual warranty costs were $6,000, accounting standards typically require that warranty expenses be matched with the associated sales revenue.

Therefore, regardless of the actual warranty costs incurred, ABC Manufacturing should recognize a warranty expense of $7,500 for 2016 to reflect the expected cost of warranties on its products sold during that year.