Multiple Choice
Which of the following statements about cost-volume-profit (CVP) analysis and breakeven calculation is TRUE?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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With respect to total variable costs, which of the following statements best describes the difference between the perpetual and periodic inventory systems?
A
Total variable costs are not recognized as cost of goods sold under either inventory system.
B
Total variable costs recognized as cost of goods sold are the same under both perpetual and periodic inventory systems.
C
Total variable costs recognized as cost of goods sold are always lower under the periodic system than under the perpetual system.
D
Total variable costs recognized as cost of goods sold are always higher under the perpetual system than under the periodic system.
Verified step by step guidance1
Understand the difference between perpetual and periodic inventory systems. The perpetual system continuously updates inventory records and cost of goods sold (COGS) as transactions occur, while the periodic system updates inventory and COGS only at the end of the accounting period.
Recognize that total variable costs are costs that change with the level of production or sales, such as direct materials and direct labor. These costs are included in the calculation of cost of goods sold (COGS).
Analyze how COGS is calculated under both systems. In the perpetual system, COGS is updated in real-time with each sale, reflecting the actual cost of inventory sold. In the periodic system, COGS is calculated at the end of the period using the formula: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \).
Evaluate whether the recognition of total variable costs as COGS differs between the two systems. Since both systems ultimately account for the same inventory and sales, the total variable costs recognized as COGS should be the same under both systems, assuming no errors or discrepancies.
Conclude that the correct statement is: 'Total variable costs recognized as cost of goods sold are the same under both perpetual and periodic inventory systems.' This is because the method of recording inventory does not change the total variable costs incurred or recognized.
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