In a manufacturing company, how is depreciation on delivery trucks (used to deliver finished goods to customers) classified for financial reporting purposes?

• A. Selling expense (a period cost reported on the income statement)
• B. Direct labor (a product cost traced to units produced)
• C. Direct materials (a product cost traced to units produced)
• D. Manufacturing overhead (a product cost included in inventory)

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the difference between product costs and period costs. Product costs are directly related to the manufacturing process and include direct materials, direct labor, and manufacturing overhead. Period costs are not tied to production and are expensed in the period incurred.
2. Step 2: Identify the nature of the asset and its use. Delivery trucks are used to deliver finished goods to customers, which is part of the selling function, not the manufacturing process.
3. Step 3: Recognize that depreciation on assets used in selling activities is classified as a selling expense, which is a period cost, because it is not part of producing inventory.
4. Step 4: Recall that manufacturing overhead includes costs related to production facilities and processes, such as factory rent, utilities, and depreciation on production equipment, but not delivery trucks.
5. Step 5: Conclude that depreciation on delivery trucks is reported as a selling expense on the income statement, reflecting its role in distribution rather than manufacturing.