A manufacturing company prepays its insurance coverage for a three-year period.

Question

A manufacturing company prepays its insurance coverage for a three-year period. The premium for the three years is $2,700 and is paid at the beginning of the first year. Eighty percent of the premium applies to manufacturing operations and 20% applies to selling and administrative activities. What amounts should be considered product and period costs respectively for the first year of coverage?

Product Period
a) $2,700 $0
b) $2,160 $540
c) $1,440 $360
d) $720 $180


a. Option A
b. Option B
c. Option C
d. Option D

Explanation / Answer

2700/3 = 900 per year 900*0.80 = 720 900*0.20 = 180 d, $720, $180 Answer: d. option D

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