insurance on stock

[LFTM]

Is insurance on stock always a period cost or can it be a product cost too? If so, how can you tell?

[pooshwaltzer]

Product Cost = Cost of inventory on hand, also called inventoriable cost . They are assets until the products are sold. Once they are sold, they become expenses.

Thus, via application of the aforementioned definition, insurance on stock is probably a period cost as it is an administrative expense which is not usually apportioned / pro-rata'ed into the unitized cost basis of inventory.

The question of cost-assignment is one which concerns the extent of relationship between the incurrence and the cost object. In the case of inventory liability insurance, the degree of correlation between the object (stock) and the subject (insurance) is not sufficiently intact to justify attribution.

[Aqualim]

Product Cost = Cost of inventory on hand, also called inventoriable cost . They are assets until the products are sold. Once they are sold, they become expenses.

Thus, via application of the aforementioned definition, insurance on stock is probably a period cost as it is an administrative expense which is not usually apportioned / pro-rata'ed into the unitized cost basis of inventory.

The question of cost-assignment is one which concerns the extent of relationship between the incurrence and the cost object. In the case of inventory liability insurance, the degree of correlation between the object (stock) and the subject (insurance) is not sufficiently intact to justify attribution.

Correct, but Insurance on stock can also be a period cost when it is not logical to apply it as a product cost e.g. The business purchased 100 Cameras valued at $100 each (plus $10 GST), with insurance of the cameras for $1600 per annum.

This would be a period cost.

[pooshwaltzer]

[/quote]
This would be a period cost.
[/quote]

I think you've misconstrued my post. I was saying that inventory insurance cannot be anything other than a period cost (admin expense) lest exceptional circumstances.

[LFTM]

is insurance on stock classified under cost of goods sold or other expenses in the profit and loss statement?

[_avO]

under COGS, other expenses don't relate to stock

[sam.utute]

under COGS, other expenses don't relate to stock

But I thought under the COGS definition (costs incurred in order to get the stock into a location and condition ready for sale) Insurance of stock would be reported under other expenses?

Also, would advertising be considered a period cost? I was doing Exambusters and it said that advertising is considered a period cost, but then I checked the definition of a period cost [cost incurred in order to get the stock into a location and condition ready for sale, that cannot be allocated to individual stock units] and advertising does not fit.

The definitions were from the Cambridge textbook. Someone please help! My teacher was unable to explain this period cost dilemma as well.
Sam

[LFTM]

under COGS, other expenses don't relate to stock

But I thought under the COGS definition (costs incurred in order to get the stock into a location and condition ready for sale) Insurance of stock would be reported under other expenses?

Also, would advertising be considered a period cost? I was doing Exambusters and it said that advertising is considered a period cost, but then I checked the definition of a period cost [cost incurred in order to get the stock into a location and condition ready for sale, that cannot be allocated to individual stock units] and advertising does not fit.

The definitions were from the Cambridge textbook. Someone please help! My teacher was unable to explain this period cost dilemma as well.
Sam

Advertising is definitely not a period cost. Well thats what my teacher said anyway.
I noticed that in exambusters as well, must be a mistake.

[_avO]

Well in cambridge, advertising for a 'sale' to promote the lowering of cost would be considered as a period cost, but I've got no clue..

[LFTM]

well this is confusing...

[_avO]

Very confusing, I hope there's some newspaper article that will tell us what to look out for before our next exam so we wont make a mistake that we're not even aware of

[pooshwaltzer]

Period costs are overheads...admin or otherwise. Advertising is a period cost. Insurance is a period cost. Attribution and degree of correlation is a question of relative extent and proportionality. The cost drivers cannot be definitively assigned to distinct stock units. I hope VCAA does a calc Q on this one and work in a few principle / qualitative short answer responses into the exam as this actually covers a fundamentally basic component of accrual double entry accounting.

PS - Advertising expenditure fits the definition of period costs quite well in fact. It is the promotional mediation which enables the business to position their operations which addresses their particular market segment as per corporate strategy / business model.

[Yitzi_K]

pooshwaltzer, while I'm sure all you're saying is absolutely correct, you do know that what is considered acceptable and the rules applied for VCE accounting may not be the same as that of uni/real accounting.

According to what I've learnt, based purely on VCE accounting, I don't see any reason why insurance or advertising must be absolutely treated as period cost rather than product.

[_avO]

My thoughts exactly, I thought anything that has to do with the preparation of stock (advertising, distribution and selling), that CAN be individually allocated should be treated as a product cost (lets say advertising of 400 dollars for 10 items of stock) even if its advertising or insurance

[pooshwaltzer]

Yitzi_K,

In order for advertising and/or stock insurance to be considered a product cost, it must be reasonably attributable to each discrete and individual unit of stock. So it's EXPENSE / AVG STOCK. Inventory is perpetual under accrual accounting. This applies even for that bane that is VCE level studies in the subject. We use average stock because point in time methods are unreliable given the periodities across which accruals transcend.

So what's AVG STOCK? It's the start and end volume of stock on hand during a selected period. And there's the crux - the word "period". You cannot apportion indirect non-scalable overhead expenses down the chain without first defining a particular time period of concern. Overheads are periodic; direct variable costs are instantaneous. As of consequence, admin expenses cannot be anything other than periodic by raw fundamental definition.

Such is why I purported the use of a calc based Q in conjunction with a theoretical short answer response to allow students to justify, substantial and clarify their choice of handling. I appreciate your thoughts on the matter though and agree with you whole-heartedly that ultimately, students do what VCAA dictates irrespective of real world settings.