Multiple Choice
The number of units produced does not affect net operating income when using which of the following inventory costing methods?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
In a manufacturing company, period costs would flow directly to which of the following accounts?
A
Cost of Goods Sold
B
Income Statement as an expense
C
Work in Process Inventory
D
Finished Goods Inventory
Verified step by step guidance1
Understand the concept of period costs: Period costs are expenses that are not directly tied to the production process. These include selling, general, and administrative expenses, and they are expensed in the period they are incurred.
Differentiate between product costs and period costs: Product costs are directly related to manufacturing and are included in inventory accounts (Work in Process Inventory or Finished Goods Inventory) until the goods are sold. Period costs, on the other hand, are not included in inventory and are expensed directly on the Income Statement.
Analyze the options provided: Cost of Goods Sold is related to product costs, as it represents the cost of inventory sold during the period. Work in Process Inventory and Finished Goods Inventory are also tied to product costs, as they represent inventory accounts. Period costs do not flow into these accounts.
Determine where period costs are recorded: Since period costs are not part of inventory or Cost of Goods Sold, they are recorded directly as expenses on the Income Statement during the period they are incurred.
Conclude that the correct answer is 'Income Statement as an expense,' because period costs are expensed immediately and do not flow into inventory or Cost of Goods Sold accounts.
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