Question

Which of the following is a period cost:

A) Annual Bonus for production support staff

B) Sales Comissions for sales staff

C) Monthly rent for the factory building

D) Both A and B

E) Both A and C

You are planning to buy a new machine for $1000. The machine will generate net cash flows of $250 a year for 10 years. The salvage value after 10 years is zero. Compute ARR (accounting rate of return).

A) 15%

B) 25%

C) 30%

D) 50%

Answer 1

D) Both A and B

period cost is any cost that cannot be capitalized into prepaid expenses, inventory, or fixed assets. A period cost is more closely associated with the passage of time than with a transactional event. ... Instead, it is typically included within the selling and administrative expenses section of the income .

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Accounting Rate of Return (ARR) is the average net income an asset is expected to generate divided by its average capital cost, expressed as an annual percentage. The ARR is a formula used to make capital budgeting decisions. These typically include situations where companies are deciding on whether or not to proceed with a specific investment (a project, an acquisition, etc.) based on the future net earnings expected compared to the capital cost.

ARR = average annual profit / average investment

Calculate the depreciation expense per year=1000/10=100

Calculate the average annual profit=250.

ARR=250/1000=25%.