Question

A manufacturing company prepays its insurance coverage for a three-year period. The premium for the three years is $2,400 and is paid at the beginning of the first year. Seventy percent of the premium applies to manufacturing operations and thirty 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:

• Period cost ⇒ $240
• Product cost ⇒ $560

Explanation:

First find out the amount of money that pertains to the first year:

= 2,400 / 3 years

= $800

Out of the $2,400, $800 is the payment for the year.

Product cost is the portion that would go towards manufacturing operations:

= 70% * 800

= $560

Period cost is the cost that applies to the selling and administrative activities:

= 30% * 800

= $240