Question

Identify each of the following costs as either a product cost (PROD) or a period cost (PER).

__1. Factory maintenance

__2. Sales commissions

__3. Depreciation—Factory equipment

__4. Depreciation—Office equipment

__5. Rent on factory building

__6. Interest expense

__7. Office manager salary

__8. Indirect materials used in making goods

Short answer

1. PROD
2. PER
3. PROD
4. PER
5. PROD
6. PER
7. PER
8. PROD

Step-by-step solution

Explanation of factory maintenance

Product cost refers to expenses that are important for manufacturing the product. It includes direct material, direct labor and factory overhead. Factory maintenance is part of factory overhead, hence it will be classified as product cost.

Explanation of Sales commissions

Period costs refer to expenses that are not related to the production process. These costs are generally related to activities related to the time period. It includes salaries expenses to a salesperson, advertising expenses, and depreciation of office furniture and equipment. Thus, sales commissions will be part of period costs.

Explanation of Depreciation—Factory equipment

Depreciation expense on factory equipment is a part of manufacturing overhead, and also this expense is necessary for the creation of the product, hence it is part of the product cost.

Explanation of Depreciation—Office equipment

Depreciation expense on office equipment is an expense which is not related to the production process, hence it is a part of the period cost.

Explanation of Rent of factory building

Rent on a factory building is a part of manufacturing overhead, and also this expense is necessary for the creation of the product, hence it is part of the product cost.

Explanation of Interest expense 

Interest expense is calculated on basis of the periods for which the funds have been used, and also this expense is non-production related, thus it is period cost.

Explanation of Office manager salary

The office manager's salary is not directly related to the production of goods, hence it will be treated as period cost.

Explanation of Indirect materials used in making goods 

Indirect materials used in the production of goods are part of manufacturing overhead. And manufacturing overhead is a part of the product cost.