Corcetti Company manufactures and sells prewashed denim jean

Corcetti Company manufactures and sells prewashed denim jeans. Large rolls of denim cloth are purchased and are first washed in a giant washing machine. After the cloth is dried, it is cut up into jean pattern shapes and then sewn together. The completed jeans are sold to various retail chains.

Option A

Option B

Option C

Option D

A) B) C) D) Direct Cost Yes Yes No No Product Cost Yes No Yes No

Solution

Answer: Option C. Direct Cost – No; Product Cost – Yes

Explanation: The soap used to wash the denim cloth is an indirect material and hence the cost of soap is an indirect material cost which is included in manufacturing overhead cost. Manufacturing overhead is a component of product cost. Hence the cost of soap is not a direct cost but it is a product cost.