Multiple Choice
Under a periodic inventory system, how is the cost of goods sold (COGS) determined at the end of the accounting period?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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In absorption costing, costs assigned to units of product include which of the following manufacturing costs?
A
Only fixed manufacturing overhead costs
B
Only direct materials and direct labor costs
C
All manufacturing costs, both variable and fixed
D
Only variable manufacturing costs
Verified step by step guidance1
Understand the concept of absorption costing: Absorption costing is a method of costing that assigns all manufacturing costs, both variable and fixed, to units of product. This includes direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.
Review the components of manufacturing costs: Manufacturing costs typically include direct materials (raw materials used in production), direct labor (wages paid to workers directly involved in production), variable manufacturing overhead (costs that vary with production levels, such as utilities), and fixed manufacturing overhead (costs that remain constant regardless of production levels, such as factory rent).
Compare absorption costing to other costing methods: Unlike variable costing, which only assigns variable manufacturing costs to products, absorption costing includes both variable and fixed manufacturing costs. This distinction is important for understanding how costs are allocated under different methods.
Analyze the options provided in the problem: Evaluate each option to determine which aligns with the principles of absorption costing. For example, 'Only fixed manufacturing overhead costs' and 'Only direct materials and direct labor costs' are incorrect because absorption costing includes all manufacturing costs. Similarly, 'Only variable manufacturing costs' is incorrect for the same reason.
Conclude that the correct answer is: 'All manufacturing costs, both variable and fixed,' as this is the definition of absorption costing. This method ensures that all costs incurred in manufacturing are assigned to the product.
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