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Chapter 18: Problem 4

Classify the following costs for Ford Motor Company as either a product cost or a period cost. a. Advertising b. Tires c. Assembly employee wages d. Salary of marketing executive e. Depreciation of Dearborn, Michigan, executive building f. CEO's salary g. Plant manager's salary h. Depreciation on Atlanta, Georgia, assembly plant i. Maintenance supplies j. Glass k. Property taxes on Kansas City, Missouri, assembly plant 1\. Shipping costs \(\mathrm{m}\). Travel costs used by sales personnel \(\mathrm{n}\). Utility costs used in executive building o. Stamping Department employee wages p. Steel

Short Answer

Expert verified
Product costs include tires, assembly employee wages, and steel. Period costs include advertising and CEO's salary.

Step by step solution

01

Understanding Cost Classification

Product costs are directly related to the production of goods and include costs such as raw materials, labor, and manufacturing overhead. These costs are included in the inventory valuation and expensed through cost of goods sold when the product is sold. Period costs, on the other hand, are not directly tied to production and include selling, general, and administrative expenses. These are expensed in the periods in which they are incurred.
02

Identifying Product Costs

Product costs include any costs necessary to bring the product to the condition and location for sale. For Ford Motor Company, these would typically include: - b. Tires - c. Assembly employee wages - g. Plant manager's salary - h. Depreciation on Atlanta, Georgia, assembly plant - i. Maintenance supplies - j. Glass - k. Property taxes on Kansas City, Missouri, assembly plant - o. Stamping Department employee wages - p. Steel
03

Identifying Period Costs

Period costs are considered "non-manufacturing expenses" and include costs such as administrative expenses, selling costs, and other costs not directly tied to manufacturing. For Ford Motor Company, the period costs would include: - a. Advertising - d. Salary of marketing executive - e. Depreciation of Dearborn, Michigan, executive building - f. CEO's salary - l. Shipping costs - m. Travel costs for sales personnel - n. Utility costs in the executive building
04

Summarizing the Classification

Here is the classification of costs for Ford Motor Company: Product Costs: b, c, g, h, i, j, k, o, p Period Costs: a, d, e, f, l, m, n

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Product Costs
Product costs are essential for manufacturing a product and getting it ready to sell. They are directly tied to the production process.
These costs are part of inventory on the balance sheet until the product is sold. Once sold, they appear on the income statement under cost of goods sold. Examples include:
  • Raw materials (e.g., tires, steel, glass for cars)
  • Direct labor (e.g., wages for assembly employees or stamping department workers)
  • Manufacturing overhead (e.g., plant manager's salary, depreciation on the assembly plant, and property taxes on the plant)
Understanding product costs helps businesses price their products appropriately and control expenses. Accurate tracking of these costs ensures better financial analysis and planning.
Period Costs
Period costs are expenses that are not directly tied to the production of goods. They are more about the general operations and sales activities of a business rather than manufacturing.
These costs are expensed in the period they are incurred and appear on the income statement. They include:
  • Selling expenses (e.g., advertising, salary of marketing executives, travel costs for sales personnel)
  • Administrative costs (e.g., CEO's salary, utility costs in executive buildings)
  • Office expenses (e.g., depreciation of the executive building)
Keep in mind, period costs can fluctuate with business activities like expansion or advertising campaigns. Properly managing these costs is crucial for maintaining profitability.
Manufacturing Expenses
Manufacturing expenses are costs incurred in the process of transforming raw materials into finished products. These are part of product costs and play a crucial role in the overall manufacturing process.
Manufacturing expenses include a combination of direct materials, direct labor, and manufacturing overhead. Some examples are:
  • Direct materials: Tires, steel, glass used in manufacturing cars
  • Direct labor: Wages for workers in the assembly line
  • Manufacturing overhead: Plant depreciation, maintenance supplies, property taxes on facilities
Efficient management of manufacturing expenses can lead to reduced production costs and increased profitability for a company. Analyzing these expenses helps in identifying potential areas for cost reduction.
Non-manufacturing Expenses
Non-manufacturing expenses are day-to-day operational costs not directly linked to product production. They consist mainly of period costs that support the overall business activities.
These expenses include selling and administrative expenses. Some typical non-manufacturing expenses include:
  • Administrative salaries, such as the CEO鈥檚 or marketing executive鈥檚 salary
  • Office-related expenses, like utility bills or depreciation of non-production buildings
  • Selling expenses, such as advertising or travel costs for sales staff
Managing non-manufacturing expenses effectively can help improve the company's bottom line. They help to measure a company's operational efficiency separate from its manufacturing capabilities.

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Most popular questions from this chapter

From the choices presented in the parentheses, choose the appropriate term for completing each of the following sentences: a. The wages of an assembly worker are normally considered a (period, product) cost. b. Direct labor costs combined with factory overhead costs are called (product, conversion) costs. c. Implementing automatic factory robotics equipment normally (increases, decreases) the factory overhead component of product costs. d. Payments of cash or its equivalent or the commitment to pay cash in the future for the purpose of generating revenues are (costs, expenses). e. Advertising expenses are usually viewed as (period, product) costs. f. The balance sheet of a manufacturer would include an account for (cost of goods sold, work in process inventory). g. Materials that are an integral part of the manufactured product are classified as (direct materials, materials inventory). h. An example of factory overhead is (plant depreciation, sales office depreciation).

Image Media, Inc. provides advertising services for clients across the nation. Image Media is presently working on four projects, each for a different client. Image Media accumulates costs for each account (client) on the basis of both direct costs and allocated indirect costs. The direct costs include the charged time of professional personnel and media purchases (air time and ad space). Overhead is allocated to each project as a percentage of media purchases. The predetermined overhead rate is \(30 \%\) of media purchases. On June 1 , the four advertising projects had the following accumulated costs: \begin{tabular}{lr} & March 1 Balances \\ \hline Fizz4U Beverage & \(\$ 105,000\) \\ First Security Bank & 175,000 \\ All-Right Rentals & 54,000 \\ SleepEzz Hotel & 14,000 \end{tabular} During June, Image Media, Inc. incurred the following direct labor and media purchase costs related to preparing advertising for each of the four accounts: \begin{tabular}{lrr} & Direct Labor & Media Purchases \\ \hline Fizz4U Beverage & \(\$ 36,000\) & \(\$ 160,000\) \\ First Security Bank & 15,000 & 140,000 \\ All-Right Rentals & 78,000 & 130,000 \\ SleepEzz Hotel & 101,000 & 80,000 \\ Total & \(\$ 230,000\) & \(\$ 510,000\) \\ \hline \end{tabular} At the end of June, both the Fizz煤U Beverage and First Security Bank campaigns were completed. The cost of completed campaigns are debited to the cost of services account. Journalize the summary entry to record each of the following for the month: a. Direct labor costs b. Media purchases c. Overhead applied d. Completion of Fizz谩U Beverage and First Security Bank campaigns

Which of the following items are properly classified as part of factory overhead for John Deere \& Co.? a. Plant manager's salary at Greeneville, Tennessee, turf care products plant b. Depreciation on Moline, Illinois, headquarters building c. Property taxes on Klemme, Iowa, components plant d. Chief financial officer's salary e. Steel plate f. Sales incentive fees to dealers g. Amortization of patents on a new welding process \(\mathrm{h}\). Interest expense on debt i. Consultant fees for surveying production employee morale j. Factory supplies used in the Kenersville, North Carolina, hydraulic excavator factory

The following account appears in the ledger after only part of the postings have been completed for March: \begin{tabular}{lr} & Work in Process \\ \hline Balance, March 1 & \(\$ 15,700\) \\ Direct materials & 84,700 \\ Direct labor & 63,200 \\ Factory overhead & 92,100 \end{tabular} Jobs finished during March are summarized as follows: \(\begin{array}{rrrr}\text { Job 320 } & \$ 56,800 & \text { Job 327 } & \$ 23,100 \\ \text { Job 326 } & 74,600 & \text { Job 350 } & 93,700\end{array}\) a. Journalize the entry to record the jobs completed. b. Determine the cost of the unfinished jobs at March 31 .

Hearth and Home Furniture Company (HHC) manufactures furniture. HHC uses a job order cost system. Balances on June 1 from the materials ledger are as follows: \(\begin{array}{lr}\text { Fabric } & \$ 32,400 \\ \text { Polyester filling } & 7,300 \\ \text { Lumber } & 106,900 \\ \text { Glue } & 1,500\end{array}\) The materials purchased during June are summarized from the receiving reports as follows: \(\begin{array}{lr}\text { Fabric } & \$ 547,300 \\ \text { Polyester filling } & 103,600 \\ \text { Lumber } & 968,100 \\ \text { Glue } & 13,200\end{array}\) Materials were requisitioned to individual jobs as follows: The glue is not a significant cost, so it is treated as indirect materials (factory overhead). a. Journalize the entry to record the purchase of materials in June. b. Journalize the entry to record the requisition of materials in June. c. Determine the June 30 balances that would be shown in the materials ledger accounts.
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