Question

which of the following statements are true?

1. advertising is not considered a product cost even if it promotes a specific product.
2. product costs are also known as inventoriable costs.
3. prime cost is the sum of direct materials cost and direct labor cost.
4. prime cost equals manufacturing overhead cost.

multiple choice

• only statement 1 is true.
• statements 1, 2, and 3 are true.
• none of the statements are true.
• both statements 1 and 4 are true.

Explanation:

Analyze Statement 1

Statement 1 states: "Advertising is not considered a product cost even if it promotes a specific product."

• Advertising is a selling and administrative expense, which is classified as a period cost.
• Period costs are expensed in the period incurred and are never treated as product costs, regardless of whether they promote a specific product.
• Therefore, Statement 1 is true.

Analyze Statement 2

Statement 2 states: "Product costs are also known as inventoriable costs."

• Product costs (direct materials, direct labor, and manufacturing overhead) are attached to units of product as they are produced and go into inventory.
• They only become expenses (cost of goods sold) when the inventory is sold.
• Therefore, product costs are indeed called inventoriable costs, making Statement 2 is true.

Analyze Statement 3

Statement 3 states: "Prime cost is the sum of direct materials cost and direct labor cost."

• Using the Prime Cost Calculation knowledge point, prime costs are defined as the direct manufacturing costs.
• The formula is:

$$ \text{Prime Cost} = \text{Direct Materials} + \text{Direct Labor} $$

• Therefore, Statement 3 is true.

Analyze Statement 4

Statement 4 states: "Prime cost equals manufacturing overhead cost."

• Prime cost consists of direct materials and direct labor, whereas manufacturing overhead consists of indirect manufacturing costs.
• These are distinct categories of manufacturing costs and are not equal.
• Therefore, Statement 4 is false.

Determine the correct option

• Since Statements 1, 2, and 3 are true, and Statement 4 is false, the correct choice is "Statements 1, 2, and 3 are true."

Answer:

• Only statement 1 is true.
• Statements 1, 2, and 3 are true. (Correct answer)
• None of the statements are true.
• Both statements 1 and 4 are true.