Multiple Choice
Which inventory system provides the most accurate and up-to-date Cost of Goods Sold (COGS) figure for use in Cost-Volume-Profit (CVP) analysis calculations?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
Which of the following costs is NOT included in the calculation of Cost of Goods Sold (COGS) under both the perpetual and periodic inventory systems?
A
Freight-in on purchased inventory
B
Advertising expenses
C
Purchase discounts lost
D
Purchase returns and allowances
Verified step by step guidance1
Step 1: Understand the concept of Cost of Goods Sold (COGS). COGS represents the direct costs attributable to the production or purchase of goods that are sold during a specific period. It includes costs such as the purchase price of inventory, freight-in, and adjustments for purchase returns, allowances, and discounts.
Step 2: Differentiate between direct costs and indirect costs. Direct costs are those directly tied to the acquisition or production of goods, such as freight-in and purchase-related adjustments. Indirect costs, like advertising expenses, are not directly related to the production or purchase of goods and are classified as operating expenses.
Step 3: Analyze each option provided in the problem: Freight-in on purchased inventory is a direct cost and included in COGS. Purchase discounts lost and purchase returns and allowances are adjustments to the cost of inventory and are also included in COGS calculations.
Step 4: Identify the cost that is NOT included in COGS. Advertising expenses are indirect costs related to promoting the goods, not acquiring or producing them. Therefore, advertising expenses are excluded from COGS under both perpetual and periodic inventory systems.
Step 5: Conclude that advertising expenses are classified as operating expenses and are reported separately on the income statement, not as part of COGS.
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