Question

Question: Georgia Pacific, a manufacturer, incurs the following costs. (1) Classify each cost as either a product (PROD) or period (PER) cost. If a product cost, identify it as direct materials (DM), direct labor (DL), or factory overhead (FO), and then as a prime (PR) or conversion (CONV) cost. (2) Classify each product cost as either a direct cost (DIR) or an indirect cost (IND) using the product as the cost object.

Cost	Direct or Indirect	Product or period	If product cost, Then:	If product cost, Then:
			Direct material, Direct labor, or Factory overhead	Prime or Conversion
1. Factory utilities
2. Advertising
3. Amortization of patent on factory machine
4. State and federal income taxes
5. Office supplies used
6. Insurance on factory building
7. Wages to assembly workers

Short answer

Answer

Cost	Direct or Indirect	Product or period	If product cost, Then:	If product cost, Then:
			Direct material, Direct labor, or Factory overhead	Prime or Conversion
1. Factory utilities	Indirect	Product	Factory overhead	Conversion
2. Advertising	Indirect	Period
3. Amortization of patent on factory machine	Indirect	Period
4. State and federal income taxes	Indirect	Period
5. Office supplies used	Indirect	Period
6. Insurance on factory building	Indirect	Period
7. Wages to assembly workers	Direct	Product	Direct labor	Conversion

Step-by-step solution

Definition of Office Supplies

Office supplies can be equipment or any assets utilized by the business entity in the offices. These are reported as assets until they are used, and after usage, they are recorded as expenses.

Cost classification

Cost	Reason
1. Factory utilities	Factory utilities are classified as indirect because this cost cannot be allocated to a single process or machine. It is a product conversion cost because it helps convert raw material into finished goods.
2. Advertising	Advertising is classified as an indirect cost because it is not directly attached to the production process. Since it is an indirect cost, it is classified as a period cost.
3. Amortization of patent on a factory machine	Amortization expenses on factory machines are classified as indirect expenses because it is not directly associated with the production of goods.
4. State and federal income taxes	It is classified as an Indirect cost because this cost does not help in producing goods and services. It is a period cost because it is incurred for a specific period.
5. Office supplies used	It is classified as an indirect and period cost because the cost incurred in the office is not directly connected to the production.
6. Insurance on factory building	It is classified as an indirect cost related to the factory building rather than production activities. It will be incurred for a specific period or the insured period.
7. Wages to assembly workers	Wages paid to assembly workers are classified as direct cost because it is directly attached to the production process. It will be classified as product conversion cost after assembling the work-in-process will get converted into finished goods.