Question

Outer Banks Shirt Shop manufactures T-shirts and decorates them with custom designs for retail sale on the premises. Some costs incurred by the company are listed below. For each cost, indicate with an "X" whether it is a period cost or a product cost. If it is a product cost, indicate whether it would be direct or indirect to T-shirts. Finally, indicate the cost behavior - fixed, variable, or mixed.

1.      Cost of new sign in front of retail T-shirt shop.

2.      Cost of fabric used in T-shirts.

3.      5% commission paid to sales personnel.

4.      Depreciation (straight line) on sewing machines.

5.      Salary of the owner's administrative assistant.

NOTE: Every cell should have an answer. If you have difficult navigating to a cell, use the TAB key rather than your mouse.

Cost Items Period Cost Direct Product Cost Indirect Product Cost Behavior: F,V,M

(Y or N?)     (Y or N?)     (Y or N?) (fixed, variable, mixed)

1

2

3

4

5

Answer 1

Sl No.

Cost items

Period cost

Direct product cost

Indirect product cost

Behaviour

1

Cost of new sign in front of retail T-shirt shop

N

N

Y

F

2

Cost of fabric used in T-shirts

N

Y

N

V

3

5% commission paid to sales personnel

Y

N

Y

V

4

Depreciation (straight line) on sewing machines

N

Y

N

F

5

Salary of the owner's administrative assistant

Y

N

Y

F

Notes:

1

Cost of new sign board can be said to be a one time expense.We can classify it as advertising expense.Since it is a one time expense,it is not a period cost

Moreover,We cant attribute this to a particular product it can be classified as indirect cost.Usuaaly,It is fixed in nature

2

Cost of fabrics used in T-shirts are direct product costs and are variable in nature.Direct product costs are not period costs

3

Commission paid to sales personnel is selling expenses and it is an indirect product cost.Since it happened over a period of time it can be said to be period cost.

Since it is based on sales $, it is variable in nature

4

Depreciation on sewing machine is a direct product cost and it is fixed in nature.Since it is a direct product cost it cant be classified as Period cost

5

Administrative salary is an indirect product cost and it is fixed per month or week.It is a period cost too