Question

Cherry is a cost accountant for Northwind Corp. She is very efficient and hard-working; however,

she occasionally transposes numbers when recording transactions. While working late recently,

Cherry accidentally recorded the P950,000 of advertising cost instead of the correct P590,000. The transaction was correctly recorded in all other respects.

Required:

Explain how Cherry’s error will affect the following: (2pts. each number)

1. Manufacturing Costs.

2. Inventory.

3. Cost of Goods Sold.

4. Period Expenses.

5. Net Income.

Answer 1

Explain how Cherry’s error will affect the following: (2pts. each number)

1. Manufacturing Costs - There will be no change in the manufacturing cost. The manufacturing costs includes materials, labor and factory overheads and does not include any selling costs. Therfore Manufacturing costs are unaffected

2. Inventory - Remains unaffected. Advertising expneses do not form a part of inventory and hence any changes thart the advertsing expense requires does not affect inventory accounts. Inventoriable costs include the cost of inventory and the frieght charges with exclusion of discounts received.

3. Cost of Goods Sold - The component of cost of goods sold are Manufacturing costs and opening and ending finished goods, Hence cost of goods remain unaffected by this error in advertising. Advertising forms a part of Selling Expenses.

4. Period Expenses - Period Expenses include selling and administrative expenses. Advertsing relates to selling expense. Any error in recording the advertising expenses will increase or decrease the Period Expenses. In this case the actual Advertising expense is P590,000, but it is charged as P950,000, it is charged with a higher amount. Therefore the Period Expenses is overcharged by (950000-590000) = P360000.

5. Net Income - We get Net Income after Decucting product and period costs form the sales revenue. Hence any error in these heads affects the Net Income. Here the Period Cost is overcharged by P360000, that leads to a decrease in the net income to the tune of P360000.

Hope this helps! In case of any clarifications, kindly use the comment box below