Which of the following statements is true regarding product and period costs?
Select one:
a. Office salaries expense and factory maintenance are both product costs.
b. Office rent is a product cost and supervisors’ salaries expense is a period cost.
c. Factory rent is a product cost and advertising expense is a period cost.
d. Delivery expense is a product cost and indirect materials is a period cost.
e. Sales commissions and indirect labor are both period costs.
The correct answer and explanation is:
The correct answer is c. Factory rent is a product cost and advertising expense is a period cost.
Explanation:
Product Costs: Product costs are expenses that are directly associated with the production of goods. These costs include direct materials, direct labor, and manufacturing overhead. Product costs are capitalized as inventory on the balance sheet until the goods are sold, at which point they become part of the cost of goods sold (COGS) on the income statement.
- Factory rent: The rent for the factory where goods are manufactured is classified as a product cost because it is part of manufacturing overhead. It is necessary for the production process and is incurred to make the product. Since this cost is directly related to manufacturing, it is capitalized as part of inventory and ultimately expensed as COGS once the product is sold.
Period Costs: Period costs are expenses that are not tied directly to production and are instead associated with the passage of time. These costs are not capitalized as inventory and are expensed in the period in which they are incurred.
- Advertising expense: This is a period cost because it is related to the marketing and selling of the product, not to its production. Advertising is incurred to promote sales, and thus it is expensed in the period in which it occurs.
Why the other options are incorrect:
- Option a: Office salaries expense is a period cost, as it’s not directly tied to production, and factory maintenance is a product cost because it is part of manufacturing overhead.
- Option b: Office rent is a period cost, and supervisors’ salaries are generally classified as product costs since they are part of manufacturing overhead.
- Option d: Delivery expense is a period cost, as it is related to the selling and distribution of the product, not production. Indirect materials are part of manufacturing overhead and are a product cost.
- Option e: Sales commissions are period costs (related to sales activities), but indirect labor (e.g., factory supervisors) is considered a product cost, as it’s part of manufacturing overhead.
Thus, option c is the correct choice as factory rent is a product cost, and advertising is a period cost.