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Explaining Effects of Cost Misclassification and Its Impact On Decision Making

Cherry, a cost accountant for Northwind Corp., accidentally recorded an advertising cost of P950,000 instead of the correct amount of P590,000 while working late. This error will overstate period expenses by P360,000 and net income for the period by the same amount, as advertising costs are considered a period expense rather than a cost affecting inventory or manufacturing costs. The error will not impact inventory, manufacturing costs, or cost of goods sold.

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Rikki Mae Teofisto
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451 views1 page

Explaining Effects of Cost Misclassification and Its Impact On Decision Making

Cherry, a cost accountant for Northwind Corp., accidentally recorded an advertising cost of P950,000 instead of the correct amount of P590,000 while working late. This error will overstate period expenses by P360,000 and net income for the period by the same amount, as advertising costs are considered a period expense rather than a cost affecting inventory or manufacturing costs. The error will not impact inventory, manufacturing costs, or cost of goods sold.

Uploaded by

Rikki Mae Teofisto
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Cherry is a cost accountant for Northwind Corp.

She is very efficient and hard-working; however,


she occasionally transposes numbers when recording transactions. While working late recently,
Cherry accidentally recorded the P950,000 of advertising cost instead of the correct P590,000. The
transaction was correctly recorded in all other respects.

Required:
Explain how Cherry’s error will affect the following:

1. Manufacturing Costs

Advertising cost will not affect the total cost of manufacturing since all the cost included in the
manufacturing are all resources consumed in the process of making a product. 

2. Inventory

Inventory include costs of purchasing and maintaining inventory, as well as handling the paperwork
related to it. Management looks at this expense as part of its calculation of how much inventory to have
on hand, hence it will not be affected by the error of recording the advertising costs.

3. Cost of Goods Sold

Cost of Goods Sold refers to the direct costs of making the product sold by a business, it would not be
influenced by the mistake in recording the costs of advertisements because it is included in the
expenses.

4. Period Expenses

Advertising costs falls under the period expense as it refers to costs that are not tied to or related to the
production of inventory. The total period expenses would have an overstated amount of ₱360,000 due
to accidental error.

5. Net Income

The total net income of the period will have an overstated amount of ₱360,000 due to error of recording
the advertising expense since it is included in deduction of expense from sales.

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