Answered: Each of the following cost items…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Each of the following cost items pertains to one of these companies: Home Depot (a merchandising-sector company), Apple (a manufacturing-sector company), and Rent a Nanny (a service-sector company):

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requirements

Requirement 1. Distinguish between manufacturing-, merchandising-, and service- companies.

▼

Manufacturing-sector

Merchandising-sector

Service-sector

companies provide services or intangible products to their

customers—for

example, legal advice or audits.

▼

Manufacturing-sector

Merchandising-sector

Service-sector

companies purchase materials and components and convert them into different finished goods.

▼

Manufacturing-sector

Merchandising-sector

Service-sector

companies purchase and then sell tangible products without changing their basic form.

Requirement 2. Distinguish between inventoriable costs and period costs.

Select whether each statement is explaining an inventoriable cost or a period cost.

▼

Inventoriable costs

Period costs

are all costs in the income statement other than cost of goods sold.

▼

Inventoriable costs

Period costs

are all costs of a product that are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold.

▼

Inventoriable costs

Period costs

for a manufacturing company are included in work-in-process and finished goods inventory (they are "inventoried") to build up the costs of creating these assets.

▼

Inventoriable costs

Period costs

are treated as expenses at the time they are incurred because they are presumed not to benefit future periods (or because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues.

Requirement 3. Classify each of the cost items

(A-I)

as an inventoriable cost or a period cost. Explain your answers.

a. Lumber at Home Depot is a(n)

▼

inventoriable cost

period cost

since the lumber is

▼

an asset (inventory) held to sale to customers.

presumed not to benefit future periods.

The cost of lumber becomes part of

▼

cost of goods sold

manufacturing overhead

operating expenses

when it is sold to customers.

b. Electricity in an Apple manufacturing plant is a(n)

▼

inventoriable cost

period cost

It is

▼

a direct cost

an indirect cost

of the product being produced.

c. Depreciation on the shelving at Home Depot is a(n)

▼

inventoriable cost

period cost

It is

▼

a cost of selling their products

a cost of the products

not

▼

a cost of selling their products

a cost of the products

d. Mileage for Rent a Nanny is a(n)

▼

inventoriable cost

period cost

since

▼

it has no inventory.

it is a cost of services provided.

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