Multiple Choice
Which of the following statements is true with respect to the cost of goods sold (COGS) equation under the perpetual and periodic inventory systems?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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Which of the following costs would NOT be allocated to products or customers under either the perpetual or periodic inventory systems?
A
Administrative salaries
B
Factory overhead
C
Direct materials
D
Direct labor
Verified step by step guidance1
Understand the concept of cost allocation: In financial accounting, costs are allocated to products or customers based on their relationship to production or service delivery. Costs directly tied to production, such as direct materials, direct labor, and factory overhead, are typically allocated to products or customers.
Define the types of costs: Direct materials are raw materials used in production, direct labor refers to wages paid to workers directly involved in production, and factory overhead includes indirect costs like utilities and maintenance related to production. Administrative salaries, however, are considered period costs and are not directly tied to production.
Differentiate between product costs and period costs: Product costs (e.g., direct materials, direct labor, and factory overhead) are associated with manufacturing and are allocated to products under both perpetual and periodic inventory systems. Period costs (e.g., administrative salaries) are not allocated to products but are expensed in the period incurred.
Review the perpetual and periodic inventory systems: Both systems track inventory and allocate product costs. The perpetual system updates inventory continuously, while the periodic system updates inventory at specific intervals. Administrative salaries are excluded from allocation in both systems because they are not related to production.
Conclude that administrative salaries are not allocated: Since administrative salaries are classified as period costs and are unrelated to production, they are not allocated to products or customers under either inventory system.
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