Answer:
a. Classify each cost as either a product or a period cost. If a product cost, identify it as direct materials, direct labor, or factory overhead, and then as a prime and/or conversion cost.
1. Factory utilities - Product cost
Factory utilities are direct materials used in the production process, therefore, they are a product cost.
2. Advertising - Period cost
Advertising is a period cost they are not directly related with the production process, but mostly with the passing of time.
3. Amortization of patents on factory machine - Period cost
Amortization is also a period cost. Amortization is the loss of value of an intangible asset over a period of time.
4. State and federal income taxes - Period cost
Taxes are not directly related to production, they are periodical payments to the state.
5. Office supplies used - Period cost
Office supplies are a general administrative expense, and general administrative expenses are considered period costs.
6. Insurance on factory building - Period cost
General administrative expenses like insurance are considered period costs.
7. Wages to assembly workers - Product cost
Wages are direct labor costs, and as a result, they are product costs.
b. Classify each product cost as either a direct cost or an indirect cost using the product as the cost object.
1. Factory utilities - direct cost
Factory utilities are directly used in the production process, it is a direct cost.
2. Advertising - indirect cost
Advertising expenses are not directly related to the production of a good, therefore, they are an indirect cost.
3. Amortization of patents on factory machine - indirect cost
Amortization on a patent is an indirect cost, because while the patent determines some characteristics of the product, it is not directly part of the production process.
4. State and federal income taxes - indirect cost
Taxes are not directly related to the production of the good, therefore, they are an indirect cost.
5. Office supplies used - indirect cost
Office supplies are administrative overhead: they are necessary, but not directly related to the production process.
6. Insurance on factory building - indirect cost
Insurance is also administrative overhead. They are an indirect cost.
7. Wages to assembly workers - direct cost
Wages to assembly workers are the cost of direct labor, as a result, they are a direct cost.
