Question

I have a question about fixed cost. I am asked to calculate the accounting and audit cost under fix cost section and it is for each of the 12 months. Accounting salary is $6,000 per month. In addition to the salary, there will be a cost for year-end audit and it is estimated to be $15,000. I put in $6000 for each of the 12 month but am not sure about the auditing cost. The instruction I was given says : “Will cost 15k so I am assuming the expense is being accrued and therefore expensed in December as an adjusting entry.” How should I put in this 15,000 correctly in financial statement? Do I distribute $1250 for each of the 12 month? Or do I add the total $15,000 to the month of December? Or do I omit it?

Answer 1

As per accrual concept the expenses should be accrued in books based on when they are incurred and not when they are paid. The accounting salary cost is incurred each month at $6,000 and it should be accrued for each month. The yearend audit is an expense which is incurred and accrued in the month of December only. Hence the expense belongs to the December month only. The audit is not performed each month for accrual of the expense. Hence monthly accrual of $1,250 gives a wrong picture of cost incurred each month and accrued.

The cost of $15,000 for yearend should be recognised as expense in the month it is incurred that is December month. The amount should not be omitted since it will understate the expenses. Hope this clarifies the concept. Monthly accrual is for expenses which are incurred on monthly basis like rent, depreciation, insurance, salaries, utilities, etc