Product vs Period Costs
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
Do you understand the terms and definitions?
1. Which of the following would most likely be included as part of manufacturing overhead for a company that makes tables?
a. amounts paid to a worker who paints the table
b. commission paid to the employees who sells the table
c. the cost of glue used in the table
d. the cost of the wood used in the table
C. How much glue is used is not easily tracked, so it would be indirect materials, a part of manufacturing overhead. (a.) is direct labor, (b.) is a period and selling cost, (d.) is direct materials since it becomes part of the product and is easy to track how much is usedg.
2. Direct labor combined with manufacturing overhead is
a. a period cost
b. conversion costs
c. prime costs
d. a direct cost
B. The definition of conversion costs is direct labor + manufacturing overhead. Manufacturing overhead is not associated with a period cost (a.) Prime and direct costs are the same thing, direct material + direct labor. (c. & d.)
3. Product costs are also called
a. inventoriable costs
b. discretionary costs
c. selling costs
d. administrative costs
A. By definition, costs that become part of inventory are product costs and are inventoriable. Both c. and d. are period costs. A discretionary cost is almost always a period cost, most product costs are necessary to make the product.
4. Which of the following would be direct labor?
a. custodians who work in the factoryIncorrect
b. supervisors on the production line
c. the worker who puts the materials together
d. the quality inspectors of the finished products
C. Direct labor touches the product to make it, which is what is occurring in c. All of the others are not directly involved in making the product and are considered part of manufacturing overhead because they are necessary costs at the plant.
5. Which of the following is not a manufacturing cost?
a. indirect laborIncorrect
b. inexpensive materials, like glue or tape
c. depreciation on a delivery truck
d. depreciation on manufacturing equipment
C. Costs related to delivering the product is a period, selling cost. Period costs are not a manufacturing cost. Manufacturing costs are product costs; direct material, direct labor and manufacturing overhead. All of the other answers are product costs and are part of manufacturing overhead which are included manufacturing costs.
6. Which of the following would be considered a direct material?
a. the plastic handle on the product
b. materials, like glue or tape, that are difficult to track
c. depreciation on a delivery truckIncorrect
d. salaries for the inspector of the completed product
A. A direct material becomes part of the product and the cost is easily traced to one product. (b. & d.) are manufacturing overhead. (b.) is an indirect material because they are not easily tracked as to how much is used to make one product. (c.) is a selling expense and a period cost.
7. The distinction between direct and indirect costs depends on whether a cost
a. is controllable or non controllable
b. can be conveniently traced to a product
c. is included in manufacturing costs
d. is paid weekly or monthly
B. Direct costs by definition can be easily and conveniently traced to the product and indirect costs can not. Either can be controllable or non controllable (a.) Either can be paid weekly or monthly (d.) and both can be part of manufacturing costs (c.). Manufacturing costs include direct material and direct labor (which are direct) and manufacturing overhead (which is indirect).
8. Which of the following would always be a period cost
a. salary of the accountant at the plant
b. salary of the inspector of the finished product
c. salary of the janitor at the plant
d. salary of the warehouse worker
D. The salary of the warehouse worker is always expensed as incurred and is a period cost. The accountant and the janitor could be working at the plant which would be a product cost, manufacturing overhead, or at the corporate office, which would be a period cost (a. and c.). The inspector of finished goods works at the plant and all costs incurred at the plant is a product cost, manufacturing overhead. (b.)
9. Write the definition of the following terms: Do not look at the answer until
you are finished writing the definition of each term. The ones that you can
not write out are the ones that you don’t really know.
Direct Labor: workers that touch the product to make the product – also includes workers who operate the machines if the product is made by machine
Direct Material: raw materials that become a part of the finished product and are easily traced to one product.
Manufacturing Overhead: all costs of manufacturing the product except direct materials and direct labor costs associated with operating the factory that makes the product. If the cost has the word “factory”, “plant”, “manufacturing”, as a descriptive word, the cost will be part of manufacturing overhead.
Period: Selling, administrative, and warehouse costs. They and are reported on the income statement as expenses as they are incurred.
Product: all costs that are required to make a product. Product costs are Direct Material, Direct Labor, Manufacturing Overhead
Prime: direct materials plus direct labor
Conversion: direct labor plus manufacturing overhead. What it costs to take the materials and convert them to a finished product
Direct: a cost that can be easily and conveniently traced to a product. Direct costs are direct materials and direct labor
Indirect: a cost that cannot be easily and conveniently traced to a product. Manufacturing overhead and period costs are indirect costs.
Do you know how to apply the terms?
1. Property taxes at the manufacturing plant is
a. a direct cost
b. a manufacturing overhead and period cost
c. a manufacturing overhead and product cost
d. a period cost – administrative
C. Expenses that occur at the manufacturing plant, other than direct material and direct labor are manufacturing overhead which are always product costs. b. and d. are incorrect because they include period costs and can not be manufacturing overhead. Manufacturing overhead is always an indirect cost (a.)
2. The cost of manufacturing finished goods inventory moves from the balance sheet to the income statement when
a. direct materials are purchased
b. production is finished
c. finished goods are sold
d. goods are moved from one work station to another
C. Costs of manufacturing a product are product costs. They become part of inventory and when the inventory is sold they are expensed as cost of goods sold on the income statement. Purchasing direct materials is the asset inventory – raw materials (a). Finished production is the asset inventory – finished goods (b). Moving goods from one work station to the other means they are in process, which is the asset inventory – work in process (d.)
3. Product costs will be found on which financial statement(s)?
a. income statement
b. balance sheet
c. both a. and b.
d. none of the above
C. Product costs become inventory and inventory is on the balance sheet until it is sold and then it is on the income statement as cost of goods sold when the inventory is sold. It is reported on both the income statement and balance sheet.
4. Which of the following would need to be allocated to a product?
a. direct material
b. direct labor
c. all manufacturing product costs
d. indirect manufacturing overhead costs
D. Manufacturing overhead is indirect because it can not be directly traced to an individual product. Since you can not tell how much is used to make each product, a part of the total cost must be allocated to each product. Direct material and direct labor are easy to determine how much is used to make one product (a. & b.) so the costs are not allocated. (c.) is not correct because it includes a. and b also.
5. Why is it important to determine if a cost is a product cost or period cost?
a. period costs are always more expensive than product costs
b. product costs are expensed when incurred
c. product costs first become part of inventory and then are expensed when they are sold
d. period costs are expensed when they are sold
C. It is important to determine which type of cost it is because product costs are inventoriable and are not expensed until the inventory is sold in order to properly match revenues with expenses. Period costs are expensed in the period they are incurred as a recurring cost of doing business. (c) is the only correct statement.