Multiple Choice
Which of the following is NOT an inventory cost flow method used in accounting for Cost of Goods Sold?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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Which of the following types of companies would be most likely to use process costing to determine Cost of Goods Sold under either a perpetual or periodic inventory system?
A
A company manufacturing identical cans of paint in large batches
B
A jewelry store selling individual, one-of-a-kind rings
C
A custom furniture maker producing unique pieces for clients
D
A law firm providing specialized legal services
Verified step by step guidance1
Understand the concept of process costing: Process costing is a method used to allocate costs in industries where production is continuous and products are indistinguishable from one another. It is commonly applied in manufacturing environments where identical units are produced in large quantities.
Analyze the options provided: The question lists four types of companies, each with different production characteristics. To determine which company would use process costing, focus on whether the production involves identical units produced in large batches.
Evaluate the first option: A company manufacturing identical cans of paint in large batches fits the criteria for process costing because the production is continuous, and the units are homogeneous (identical). Costs can be allocated evenly across all units.
Evaluate the other options: A jewelry store selling one-of-a-kind rings, a custom furniture maker producing unique pieces, and a law firm providing specialized services do not fit the criteria for process costing. These businesses produce unique, individualized products or services, which are better suited for job costing rather than process costing.
Conclude the analysis: Based on the characteristics of process costing, the company manufacturing identical cans of paint in large batches is the most likely to use this method to determine Cost of Goods Sold under either a perpetual or periodic inventory system.
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