A Company Buys Large Recreational Vehicles ("RVS") and Sells Them

question 122

Multiple Choice

A company buys large recreational vehicles ("RVS") and sells them on credit. The company uses a perpetual inventory system and always pays for purchases within the discount period by borrowing. Information about the latest purchase of an RV is: $\begin{array} { | l | l | } \hline \text { Purchase price } & \$ 60,000 \\\hline \text { Delivery charges } & 2,500 \\\hline \text { Terms, on credit, } 5 / 30 , \mathrm { n } / 90 \text { Insurance premium paid } & 3,000 \\\hline \text { Cleaning and making ready for sale } & 250 \\\hline \text { Interest on purchase loan } & 7,200 \\\hline \text { Cost of permanent shed built to display the RV pending sale } & 3,750 \\\hline\end{array}$ The cost that should be assigned to the RV for inventory purposes is:

• A) $65,750
• B) $62,750
• C) $59,750
• D) $60,000

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Definitions:

Activity-Based Costing

An accounting method that assigns overhead and indirect costs to related products and services by identifying cost drivers.

Machine-Hours

Machine-Hours measure the amount of time machines are in operation during a certain period, often used for allocating machine-related expenses to products.

Activity Cost Pools

A method in cost accounting where costs are accumulated according to the activities that incur them.

Activity-Based Costing

A costing methodology that assigns costs to products and services based on the resources consumed in the production process.