Question

2-33 Inventoriable versus period costs. The following items appear as cost of a manufacturing company: A. Depreciation on plant and equipment B. Depreciation on delivery vans C. Insurance on plant and building D. Marketing manager's salary E. Raw materials E Manufacturing overheads G. Electricity bill for the residential quarters H. Production staff wages 1. Identify the following as either an inventoriable product cost or a period cost. 2. Using the following information, compute the cost of goods manufactured: 3. Direct materials £24,000 4. Direct labor £9,000 5. Manufacturing overheads £17,000 6. Beginning work in process inventory £12,000 7. Ending work in process inventory £5,000

Answer 1

1. Before classifying the above mentioned items(in part 1) as product or period cost, let us see what is the basic diffference between these two costs

Product Cost - These all are those costs which are directly related to production of product or service.

Period Cost - These all are those indirect costs which are incurred during the production process.

Let us classify the above items---

a. Depreciation on Plant and Equipment - It will be a Product Cost here as the machinery is directly involved in manufacturing process.

b. Depreciation on Delivery Vans - It will be a Period Cost as the cost is not directly related to production.

c. Insurance of Plant and Building - It will be a Product Cost as the cost is incurred for ensuring the production of product to be smooth.

d. Marketing Manager Salary - It will be a Period Cost as the cost is not related to production of the product.

e. Raw Materials - It will be a Product Cost as the cost is directly related to production.

f. Manufacturing Overheads - Manufacturing Overheads are a part of Product Cost as they are incurred for smooth production.

g. Electricity Bill for Residential Quarters - It will be a Period Cost as the cost is not directly related to production activity.

h. Production Staff Wages - It will be a Product Cost as the cost is directly related to production activity.

2. Computation of Cost of Goods Sold from the data given -

First we will calculate the Total Manufacturing costs for the period which is - Direct Material Cost + Direct Labor Cost + Manufacturing Overheads

Using our question data, Total Manufacturing costs for the period will be - GBP 24,000 + GBP 9,000 + GBP 17,000

which gives the total as - GBP 50,000

Now we will calculate the Cost of goods manufactured during the period which is given by - Cost of work in progress (WIP) inventory at the start of the period minus(-) Cost of work in progress (WIP inventory at the end of the period)

So using the data as per our question Cost of goods manufactured during the period will be = GBP 12,000 - GBP 5,000

which gives GBP 7,000 as the Cost of goods manufactured during the period.

Now Cost of Goods Sold will be Total Manufacturing costs for the period + Cost of goods manufactured during the period

which gives Cost of Goods Sold as = GBP 50,000 + GBP 7,000 = GBP 57,000 as the final answer.

Hope it is clear.

Thank you