Question

1. Indicate whether each item below is a product cost (inventoriable cost) or a period cost. If it’s a product cost say whether it is DM (direct materials), DL (direct labor) or MO (manufacturing overhead, also called indirect manufacturing costs). If it is a period cost, indicate whether it is AE (administrative expense) or SE (selling expense). Also indicate whether it is a fixed cost (FC) or a variable cost (VC). These costs are for a company that makes tires.

1. Cost of the rubber that goes into the tire
2. Depreciation cost of $10,000 per year for equipment used by the company’s top management
3. Depreciation cost of $15,000 per year for machines used in the factory where the tires are made
4. Depreciation cost of $12,000 per year for cars used by the company’s salespeople
5. Cost of paying $15 per hour to the workers who make the tires. The more tires that are made, the more hours the workers work.
6. Commissions paid to the salespeople that equal $10 for each tire the salesperson sells.
7. The cost of oil to lubricate the machines in the factory.
8. Salary of the factory supervisor which is $9,000 per month
1. Salary of the president of the company which is $20,000 per month.
10. Salary of the sales manager that equals $15,000 per month.

Answer 1

a
Cost of rubber that goes into the tire
- It is a Product cost as Cost of rubber depends on the Number of products (Tires) produced
- It is a Direct Material as rubber is raw material needed for manufacture of Tire
- It is a variable cost because the more tire is produced, the more rubber is needed and vice versa

b
Depreciation of $10000 per year for equipment used by the company's top management
- It is a Period cost as Equipment is depreciated with the passage of time
- It is not a Selling expense as Depreciation does not help in making product salable but is an administrative expense
- It is a Fixed cost as it will incur irrespective of the level of usage

c
Depreciation cost of $15000 per year for machines used in factories where tires are made
- It is a Period cost as machine is depreciated with the passage of time
- It is not a Selling expense as Depreciation does not help in making product salable but is an administrative expense
- It is a Fixed cost as it will incur irrespective of the level of usage

d
Depreciation cost of $12000 per year for cars used by company's salesperson
- It is a Period cost as Car is depreciated with the passage of time
- It is a selling expense as car is used by company's salesperson to increase the level of sales volume
- It is a Fixed cost as it will incur irrespective of the level of usage

e
Cost of paying $15 per hour to the workers who make the tires. The more tires that are made, the more hours the workers work
- It is a Product cost because because wages are paid based on hours and hours are based on number of tires made
- It is a Direct labor as Labor of workers directly contribute to production of tires
- It is a variable cost as Wages rises or falls based on number of hours worked and number of tires produced

f
Commission paid to salespeople that equal $10 for each tire the salesperson sells
- It is a Product cost as commission is directly associated to the number of products sold by salespeople
- It is an Indirect manufacturing cost (MO) as it does not directly relate to manufacture of tires but is related to their sales
- It is a variable cost as salespeople are paid high or small commission based on more or less tires sold

g
The cost of oil to lubricate the machines in the factory
- It is a product cost as it is applied based on products produced by machines and not just periodically
- It is Indirect manufacturing cost (MO) as it's effect cannot be directly associated to products produced by machines.
- It is variable cost as it varies depending on the number of products produced by machine

h
Salary of Factory supervisor which is $9000 per month
- It is a Period cost as it is paid on monthly basis irrespective of level of production
- It is an administrative cost as it is incurred indirectly for carrying on production process
- It is a Fixed expense as it does not vary with level of production

i
Salary of the president of the company which is $20000 per month
- It is a Period cost as it is paid on monthly basis irrespective of level of production
- It is an administrative cost as it is incurred indirectly for running the business
- It is a Fixed expense as it does not vary with level of production

j
Salary of the sales manager that equals $15000 per month
- It is a Period cost as it is paid on monthly basis irrespective of level of production
- It is a selling cost as it is incurred with the purpose of increase sales promotion activities
- It is a Fixed expense as it is paid per month no matter how much sales rises or falls