Question

A manufacturing company prepays its insurance coverage for a three-year period. The premium for the three years is $3,120 and is paid at the beginning of the first year. Ninety percent of the premium applies to manufacturing operations and ten 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

Answer and Explanation:

The computation of the amount of the product and period cost is shown below:

Given that

Total Payment made for Three Years = $3,120

Per Year Payment is

= $3,040 ÷ 3 years

=$1,040

Now

90% of the per year payment is allocated to manufacturing operations

= $1,040 × 90%

= $936

And, 10% is Applied to Selling and Administrative Activities

= $1,040 × 10%

= $104

So, the product and period costs for the first year of coverage are $936 and $104 respectively.