Chapter 11, Problem 11.1RQ

To determine

Concept Introduction:

Audit procedure: audit procedure is a method performed by the auditor, to gather the possible document that helps the auditors to make a strong conclusion. The audit procedure helps to determine the nature of the financial information provided by the customers and all kinds of risks that occur in the financial statements.

To discuss: the three categories of expense and examples of each category.

Explanation of Solution

The expense is a cost that obtain, when a business incurred something. The three categories of expenses are as follows:

Product cost: a product cost is an expense that occurred when a business required a specific product, and this cost can be matched directly with the recorded transactions.

Example: a perfect example of product cost is inventory which occurs by the cost of goods sold.

Period cost: a period cost is an expense that based on the time. These types of expenses are not fixed earlier as they occur during the period in which cash spent to get the goods or services.

Example: rent, salaries, and interests are the best example of period cost.

Allocable cost: the expense recognize on the assets, known as allocable cost. When an existing asset is expected to provide the benefit in the future, the cost spent on those assets, called as allocable cost.

Example: The depreciation of machinery is the best example of allocable cost.