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A manufacturing company prepays its insurance coverage for a three-year period. The premium for the three years is $2,100 and is paid at the beginning of the first year. Sixty percent of the premium applies to manufacturing operations and forty percent applies to selling and administrative activities. What amounts should be considered product and period costs respectively for the first year of coverage?

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Answer:

Period cost=  $840

Product cost=  $1260

Explanation:

Product costs are the direct costs involved in producing a product.

Period costs are not directly tied to the production process.  

The insurance premiums that a company pays for nonmanufacturing protection will be expensed in the period in which the insurance premiums expire. However, the insurance premiums for the manufacturing operations will become part of the product costs as the insurance premiums expire.

In this exercise:

Period cost= 2100*0,40= $840

Product cost= 2100*0,60= $1260

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