Chapter 1, Problem 2PSA

The following calendar year-end information is taken from the December 31, 2015, adjust trial balance and other records of Leone Company.

Required

1. Identity and classify each of the costs above as either a product or period cost.
2. Classify each of the product costs as either direct materials, direct labor, or factory overhead.
3. Classify each of the period costs as either selling or general and administrative expenses.

To determine

Concept introduction:

Product cost:

The costs are incurred when the product is acquired or produced and are considered in the inventory valuation. It includes costs of direct materials, direct labor and manufacturing overheads. Rents on factory building, factory maintenance, and depreciation on factory equipment are some of its examples.

Period cost:

These costs are associated with the passage of time, i.e. when the business has no production or inventory purchasing activities, this cost would still be incurred. Mostly, these costs are associated with selling or general and administrative activities. Depreciation on office equipment, advertising expense and office manager salaries are some of its examples.

Requirement 1:

Identification and Classification of costs of Leone Company as either product or period.

Answer to Problem 2PSA

Classification of costs of Leone Company (Amount in $):

Particulars	Product cost	Period cost
Advertising expense		28, 750
Depreciation expense- Office equipment		7, 250
Depreciation expense- Selling equipment		8, 600
Depreciation expense- Factory equipment	33, 550
Factory supervision	1, 02, 600
Factory supplies used	7, 350
Factory utilities	33, 000
Direct labor	6, 75, 480
Indirect labor	56, 875
Miscellaneous production costs	8, 425
Office salaries expense		63, 000
Raw materials purchases	9, 25, 000
Rent expense- Office space		22, 000
Rent expense- Selling space		26, 100
Rent expense- Factory building	76, 800
Maintenance expense- Factory equipment	35, 400
Sales salaries expense		3, 92, 560

Explanation of Solution

The costs of Leone Company can be classified into product or period based on their nature as explained below:

Product costs are incurred when the product is acquired or produced and are considered in the inventory valuation. It includes costs of direct materials, direct labor and manufacturing overheads. Therefore, following costs would be classified as Product:

• Depreciation expense- Factory equipment: as it relates to manufacturing overheads
• Factory supervision: as it relates to manufacturing overheads
• Factory supplies used: as it relates to manufacturing overheads
• Factory utilities: as it relates to manufacturing overheads
• Direct labor: as it is cost of direct labor
• Indirect labor: as it relates to manufacturing overheads
• Miscellaneous production costs: as it relates to manufacturing overheads
• Raw material purchases: as it relates to direct materials
• Rent expense- Factory building: as it relates to manufacturing overheads
• Maintenance expense- Factory equipment: as it relates to manufacturing overheads

Period costs are associated with the passage of time, i.e. when the business has no production or inventory purchasing activities, this cost would still be incurred. Mostly, these costs are associated with selling or general and administrative activities. Following would be classified as Period costs:

• Advertising expense: : as it relates to selling activity
• Depreciation expense- Office equipment: as it relates to general and administrative activity
• Depreciation expense- Selling equipment: as it relates to selling activity
• Office salaries expense: as it relates to general and administrative activity
• Rent expense- Office space: as it relates to general and administrative activity
• Rent expense- Selling space: as it relates to selling activity
• Sales salaries expense: as it relates to selling activity

Therefore, identification and classification of costs of Leone Company, as asked in the given problem is shown below:

Classification of costs of Leone Company (Amount in $):

Particulars	Product cost	Period cost
Advertising expense		28, 750
Depreciation expense- Office equipment		7, 250
Depreciation expense- Selling equipment		8, 600
Depreciation expense- Factory equipment	33, 550
Factory supervision	1, 02, 600
Factory supplies used	7, 350
Factory utilities	33, 000
Direct labor	6, 75, 480
Indirect labor	56, 875
Miscellaneous production costs	8, 425
Office salaries expense		63, 000
Raw materials purchases	9, 25, 000
Rent expense- Office space		22, 000
Rent expense- Selling space		26, 100
Rent expense- Factory building	76, 800
Maintenance expense- Factory equipment	35, 400
Sales salaries expense		3, 92, 560

To determine

Concept introduction:

Product cost:

The costs are incurred when the product is acquired or produced and are considered in the inventory valuation. It includes costs of direct materials, direct labor and manufacturing overheads. Rents on factory building, factory maintenance, depreciation on factory equipment are some of its examples.

Direct materials:

These are the cost of materials used for production of the product. The cost of all the materials integral to finished product and having a physical presence that is readily traced to that finished product is included in direct materials.

Direct labor:

These consist of wages paid to labor who have physically and directly work on the goods being produced other than administrative and selling activities.

Factory overheads:

All other costs remaining other than direct materials and direct labor relating to factory comes under Factory overheads.

Requirement 2:

Identification and Classification of product costs of Leone Company as direct materials, direct labor and factory overheads.

Answer to Problem 2PSA

Classification of product costs of Leone Company (Amount in $):

Particulars	Direct materials	Direct labor	Factory overheads
Depreciation expense- Factory equipment			33, 550
Factory supervision			1, 02, 600
Factory supplies used			7, 350
Factory utilities			33, 000
Direct labor		6, 75, 480
Indirect labor			56, 875
Miscellaneous production costs			8, 425
Raw materials purchases	9, 25, 000
Rent expense- Factory building			76, 800
Maintenance expense- Factory equipment			35, 400

Explanation of Solution

The product costs of Leone Company can be classified into direct materials, direct labor and factory overheads based on their nature as explained below:

Direct materials are the cost of materials used for production of the product. Therefore, costs of Raw material purchases would be classified under direct materials.

Direct labor includes wages paid to labor who have physically and directly work on the goods being produced other than administrative and selling activities. Only cost of direct labor would be covered under direct labor.

All other costs remaining other than direct materials and direct labor relating to factory comes under Factory overheads. Therefore, following costs would factory overheads:

• Depreciation expense- Factory equipment
• Factory supervision
• Factory supplies used
• Factory utilities
• Indirect labor
• Miscellaneous production costs
• Rent expense- Factory building
• Maintenance expense- Factory equipment

Therefore, identification and classification of product costs of Leone Company, as asked in the given problem is shown below:

Classification of product costs of Leone Company (Amount in $):

Particulars	Direct materials	Direct labor	Factory overheads
Depreciation expense- Factory equipment			33, 550
Factory supervision			1, 02, 600
Factory supplies used			7, 350
Factory utilities			33, 000
Direct labor		6, 75, 480
Indirect labor			56, 875
Miscellaneous production costs			8, 425
Raw materials purchases	9, 25, 000
Rent expense- Factory building			76, 800
Maintenance expense- Factory equipment			35, 400

To determine

Concept introduction:

Period cost:

These costs are associated with the passage of time, i.e. when the business has no production or inventory purchasing activities, this cost would still be incurred. Mostly, these costs are associated with selling or general and administration activities. Depreciation on office equipment, advertising expense and office manager salaries are some of its examples.

Selling expenses:

These are the expenses incurred for making sales. These include direct and indirect cost associated with selling a product.

General and administrative expenses:

These are basically the overheads of the company. These are the costs a company incurs to keep its business operational.

Requirement 3:

Identification and Classification of period costs of Leone Company as selling and general or administration expenses.

Answer to Problem 2PSA

Classification of period costs of Leone Company (Amount in $):

Particulars	Selling expenses	General or administration expenses
Advertising expense	28, 750
Depreciation expense- Office equipment		7, 250
Depreciation expense- Selling equipment	8, 600
Office salaries expense		63, 000
Rent expense- Office space		22, 000
Rent expense- Selling space	26, 100
Sales salaries expense	3, 92, 560

Explanation of Solution

The period costs of Leone Company can be classified into product or period based on their nature as explained below:

Period costs are associated with the passage of time and are associated with selling and general or administration activities.

Selling expenses are incurred for making sales and include direct and indirect cost associated with selling a product. Following would be covered under selling expenses:

• Advertising expense:
• Depreciation expense- Selling equipment
• Rent expense- Selling space
• Sales salaries expense

General or administrative expenses are the overheads a company incurs to keep its business operational. Following are classified under them:

• Depreciation expense- Office equipment
• Office salaries expense
• Rent expense- Office space

Therefore, identification and classification of period costs of Leone Company, as asked in the given problem is shown below:

Classification of period costs of Leone Company (Amount in $):

Particulars	Selling expenses	General or administration expenses
Advertising expense	28, 750
Depreciation expense- Office equipment		7, 250
Depreciation expense- Selling equipment	8, 600
Office salaries expense		63, 000
Rent expense- Office space		22, 000
Rent expense- Selling space	26, 100
Sales salaries expense	3, 92, 560