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Horngren'S Financial And Managerial Accounting
Found in: Page 899

Short Answer

Classifying period costs and product costs

Langley, Inc. is the manufacturer of lawn care equipment. The company incurs the following costs while manufacturing edgers:

• Handle and shaft of edger

• Motor of edger

• Factory labor for workers assembling edgers

• Lubricant used on bearings in the edger (not traced to the product)

• Glue to hold the housing together

• Plant janitorial wages

• Depreciation on factory equipment

• Rent on plant

• Sales commissions

• Administrative salaries

• Plant utilities

• Shipping costs to deliver finished edgers to customers

Requirements

1. Describe the difference between period costs and product costs.

2. Classify Langley’s costs as period costs or product costs. If the costs are product costs, further classify them as direct materials, direct labor, or manufacturing overhead.

Period costs are operating costs and products costs are associated with products and classification into period costs and product costs is done as required.

See the step by step solution

Step by Step Solution

Step-by-Step SolutionStep 1: Difference between period costs and product costs

Period costs are defined as the operating costs that are expensed in the accounting period in which they are incurred. On the other hand, product cost includes all the costs of the product as required by the GAAP. These costs are recorded as the asset until the goods are sold. If the goods are sold then they are recorded as the cost of goods sold (expense).

Step 2: Classification of the costs

Costs

Classification

Handle and shaft of edger

Product cost, Direct material

Motor of edger

Product cost, Direct material

Factory labor for workers assembling edgers

Product cost, Direct labor

Lubricant used on bearings in the edger (not traced to the product)

Product cost, Manufacturing Overhead

Glue to hold the housing together

Product cost, Manufacturing Overhead

Plant janitorial wages

Product cost, Manufacturing Overhead

Depreciation on factory equipment

Product cost, Manufacturing Overhead

Rent on plant

Product cost, Manufacturing Overhead

Sales commissions

Period Costs

Administrative salaries

Period Costs

Plant utilities

Product cost, Manufacturing Overhead

Shipping costs to deliver finished edgers to customers

Period Costs

Most popular questions for Business-studies Textbooks

Power Switch, Inc. designs and manufactures switches used in telecommunications. Serious flooding throughout North Carolina affected Power Switch’s facilities. Inventory was completely ruined, and the company’s computer system, including all accounting records, was destroyed.

Before the disaster recovery specialists clean the buildings, Stephen Plum, the company controller, is anxious to salvage whatever records he can to support an insurance claim for the destroyed inventory. He is standing in what is left of the accounting department with Paul Lopez, the cost accountant.

“I didn’t know mud could smell so bad,” Paul says. “What should I be looking for?”

“Don’t worry about beginning inventory numbers,” responds Stephen, “we’ll get them from last year’s annual report. We need first-quarter cost data.”

“I was working on the first-quarter results just before the storm hit,” Paul says. “Look, my report is still in my desk drawer. All I can make out is that for the first quarter, direct material purchases were $476,000 and direct labor, manufacturing overhead, and total manufacturing costs to account for were $505,000, $245,000, and $1,425,000, respectively. Wait! Cost of goods available for sale was $1,340,000.”

“Great,” says Stephen. “I remember that sales for the period were approximately $1,700,000. Given our gross profit of 30%, that’s all you should need.”

Paul is not sure about that but decides to see what he can do with this information. The beginning inventory numbers were:

• Direct Materials, $113,000

• Work-in-Process, $229,000

• Finished Goods, $154,000

Requirements

1. Prepare a schedule showing each inventory account and the increases and decreases to each account. Use it to determine the ending inventories of Direct Materials, Work-in-Process, and Finished Goods.

2. Itemize a list of the cost of inventory lost.

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