Multiple Choice
Under both the perpetual and periodic inventory systems, when does the cost of inventory become an expense (Cost of Goods Sold) on the income statement?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
Which of the following best describes an activity-based approach to designing a costing system?
A
Assigning costs to products based on the activities required to produce them, using multiple cost drivers.
B
Valuing inventory at the lower of cost or market.
C
Recording inventory purchases only at the end of the accounting period.
D
Allocating all manufacturing overhead evenly across all products regardless of resource usage.
Verified step by step guidance1
Understand the concept of an activity-based costing (ABC) system: Activity-based costing assigns costs to products based on the activities required to produce them. It uses multiple cost drivers to allocate costs more accurately, reflecting the actual consumption of resources.
Analyze the options provided in the question: The correct answer should align with the principles of activity-based costing, which focuses on assigning costs based on activities and resource usage rather than evenly distributing costs or using simplified methods.
Option 1: 'Assigning costs to products based on the activities required to produce them, using multiple cost drivers' aligns with the definition of activity-based costing. This is the most accurate description of the ABC approach.
Option 2: 'Valuing inventory at the lower of cost or market' is a separate accounting principle related to inventory valuation, not activity-based costing.
Option 3 and Option 4: 'Recording inventory purchases only at the end of the accounting period' and 'Allocating all manufacturing overhead evenly across all products regardless of resource usage' do not reflect the principles of activity-based costing. These methods are either unrelated or oversimplified compared to the ABC approach.
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