Multiple Choice
Which variance measures the difference between the actual cost paid for materials and the standard cost expected to be paid for those materials in the production process?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
Which of the following best describes the flow of product costs in a manufacturing company using a perpetual inventory system?
A
Product costs are never included in inventory accounts and are treated as period costs.
B
Product costs are recorded in inventory accounts as incurred and transferred to Cost of Goods Sold at the time of each sale.
C
Product costs are expensed immediately as incurred, without being recorded in inventory accounts.
D
Product costs are only recorded at the end of the accounting period and transferred to Cost of Goods Sold in a single entry.
Verified step by step guidance1
Understand the concept of product costs: Product costs include direct materials, direct labor, and manufacturing overhead. These costs are associated with the production of goods and are initially recorded as part of inventory.
Learn about the perpetual inventory system: In a perpetual inventory system, inventory accounts are continuously updated to reflect purchases, production, and sales. This system provides real-time tracking of inventory levels and costs.
Recognize the flow of product costs: In a manufacturing company using a perpetual inventory system, product costs are recorded in inventory accounts as they are incurred during production. This ensures that the costs are accurately tracked as part of the inventory value.
Understand the transfer to Cost of Goods Sold (COGS): When a product is sold, the associated product costs are transferred from inventory accounts to the Cost of Goods Sold account. This reflects the expense of producing the goods that have been sold.
Compare the options provided: The correct description aligns with the perpetual inventory system's process, where product costs are recorded in inventory accounts as incurred and transferred to Cost of Goods Sold at the time of each sale. Other options either misrepresent the treatment of product costs or describe processes inconsistent with the perpetual inventory system.
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