Multiple Choice
Why are inventories reported as current assets on the balance sheet?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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Which of the following is NOT considered a period cost under either the perpetual or periodic inventory systems?
A
Direct materials used in production
B
Administrative salaries
C
Office rent expense
D
Advertising expense
Verified step by step guidance1
Understand the concept of period costs: Period costs are expenses that are not directly tied to the production process and are expensed in the period they are incurred. Examples include administrative salaries, office rent, and advertising expenses.
Understand the concept of product costs: Product costs are costs directly associated with the production of goods, such as direct materials, direct labor, and manufacturing overhead. These costs are capitalized as inventory and expensed as cost of goods sold when the goods are sold.
Analyze the options provided: Direct materials used in production are considered product costs because they are directly tied to the manufacturing process. Administrative salaries, office rent expense, and advertising expense are considered period costs because they are not directly related to production.
Compare the definitions: Since period costs are not tied to production, direct materials used in production cannot be classified as a period cost under either the perpetual or periodic inventory systems.
Conclude the reasoning: The correct answer is 'Direct materials used in production,' as it is a product cost and not a period cost.
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