Question

A manufacturing company prepays its insurance coverage for a three-year period. The premium for the three years is $4,770 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

$1,113 ; $477

Step-by-step explanation:

The computation of the allocation of premium for the three years is shown below:

For product cost, it is

= Premium for the three years × given percentage ÷ number of years

= $4,770 × 70% ÷ 3

= $1,113

And, for the period cost, it is

= Premium for the three years × given percentage ÷ number of years

= $4,770 × 30% ÷ 3

= $477

The period cost is mainly deals with the selling and administrative activities while the product cost is deals with the manufacturing operations