Multiple Choice
Another common term for stockholders' equity is:
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1. Introduction to Accounting
Types of Accounting
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Which type of cost is represented by the depreciation expense on factory equipment used in the production process?
A
Administrative cost
B
Period cost
C
Direct material cost
D
Product cost
Verified step by step guidance1
Understand the concept of depreciation expense: Depreciation is the allocation of the cost of a tangible asset over its useful life. In this case, the factory equipment is used in the production process, so its depreciation is tied to manufacturing activities.
Review the definition of a product cost: Product costs are costs that are directly associated with the production of goods. These include direct materials, direct labor, and manufacturing overhead. Depreciation on factory equipment falls under manufacturing overhead.
Differentiate product costs from period costs: Period costs are expenses that are not directly tied to production, such as administrative costs or selling expenses. Depreciation on factory equipment is not a period cost because it is directly related to production.
Eliminate incorrect options: Administrative costs are related to the general management of the company, and direct material costs refer to raw materials used in production. Depreciation on factory equipment does not fit these categories.
Conclude that depreciation expense on factory equipment is a product cost because it is part of manufacturing overhead, which is included in the cost of producing goods.
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