Income Measurement and the Objectives of Financial Reporting
a.Employee wages of employees actually making the candy would be a product cost because
they can be attached to the production of candy. People indirectly associated with production
of candy could be treated as a period cost.
b. The advertising costs can be attached to the produce to evaluate the overall performance of
the candy sensation. In practice advertising costs aren’t included in inventory since they
aren’t part of the cost of production and it’s difficult to determine how, if, or when particular
advertising contributed to sales.
c.Depreciation would be a period cost as the benefit that head office provides for each product
is not measurable.
d. Sales commissions are product costs because they can be matched to specific revenues, the
revenues that were earned as a result of the efforts by the sales person. Sales commissions
would be expensed when the revenue they pertained to was recognized.
e.Ingredients are product costs since they can be easily allocated to specific products.
f. Conceptually these are product costs since they can be allocated to products. Utilities in a
plant can be associated with the production of products. In practice, utilities might be treated
as period costs if the allocation of the costs is too arbitrary.
g. These are product costs because they can be associated with particular sales (i.e. the revenue
associated with the merchandise in the truck).
h. These salaries would be period costs since the work of head office employees and senior
executives can’t reasonably be associated with specific products.
i.Conceptually these costs are part of the costs of the candies that are introduced, but in
practice they would often be expensed entirely or partially as period cost.
a. Recognize revenue when the contract is signed.
December 13, 2015
Dr. Accounts Receivable550,000
Cr. Revenue 550,000
Dr. Cost of goods sold 300,000
Cr. Liability for Installation Costs300,000
[It’s assumed that the provision for warranty costs is included in this entry. A student
could also prepare a separate entry to record the warranty provision (Dr. Warranty
expense, Cr. Warranty liability). The important point is that the warranty cost should be
accrued at the time the revenue is recognized.]
Copyright © 2010 McGraw-Hill Ryerson Ltd.
John Friedlan, Financial Accounting: A Critical Approach, 3e