Mary didn't know what to do about the memo. It wasn't intended for her, but its contents were alarming.
Required:
a. Why has Gary Resnick suggested reclassifying some period costs as product costs?
b. Why do you think Mary was alarmed about the memo?
Answer:
a. Gary Resnick has suggested reclassifying some period costs as product costs since the company is building up large finished goods inventories in anticipation of the Christmas selling season. Product costs are inventoried and flow through to the income statement only when products are sold. Period expenses, in contrast, flow directly to the income statement. Because most of the finished goods inventories will be held over to the next quarter, reclassifying period costs as product costs will effectively defer recognition of expenses until next quarter and therefore will improve the current quarter's net operating income.
b. Mary Tappin is probably alarmed by both the economic situation the company finds itself in and by the apparent willingness of top management to bend the rules. Improperly reclassifying costs is an indication that top management does not feel like it has to play by the rules or be honest in its dealings with the bank. With such loose ethical standards, Mary may wonder what other unethical things they are doing.
Difficulty: 2 Medium
Topic: Cost Classifications for Preparing Financial Statements
Learning Objective: 01-03 Understand cost classifications used to prepare financial statements: product costs and period costs.
Bloom's: Apply
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
285) Marquess Corporation has provided the following partial listing of costs incurred during May:
Marketing salaries
$
39,000
Property taxes, factory
$
8,000
Administrative travel
$
102,000
Sales commissions
$
73,000
Indirect labor
$
31,000
Direct materials
$
197,000
Advertising
$
145,000
Depreciation of production equipment
$
39,000
Direct labor
$
78,000
Required:
a. What is the total amount of product cost listed above? Show your work.
b. What is the total amount of period cost listed above? Show your work.
Answer:
a. Product costs consist of direct materials, direct labor, and manufacturing overhead:
Direct materials
$
197,000
Direct labor
78,000
Manufacturing overhead:
Property taxes, factory
$
8,000
Indirect labor
31,000
Depreciation of production equipment
39,000
78,000
Total product cost
$
353,000
b. Period costs consist of all costs other than product costs:
Marketing salaries
$
39,000
Administrative travel
102,000
Sales commissions
73,000
Advertising
145,000
Total period cost
$
359,000
Difficulty: 2 Medium
Topic: Cost Classifications for Preparing Financial Statements
Learning Objective: 01-03 Understand cost classifications used to prepare financial statements: product costs and period costs.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
286) Classify the following costs for an auto manufacturer as either direct materials, direct labor, manufacturing overhead, or period costs.
Direct Materials
Direct Labor
Manufacturing Overhead
Period Cost
a.
Steel used in automobiles
b.
Assembly department employee wages
c.
Utility costs used in executive building
d.
Travel costs of sales personnel
e.
Cost of shipping goods to customers
f.
Property taxes on assembly plant