Multiple Choice
Companies must have a carefully constructed inventory policy in order to:
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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Which of the following best describes costs that are crucial parts of the finished product in the context of inventory accounting?
A
Indirect labor
B
Selling costs
C
Direct materials
D
Administrative expenses
Verified step by step guidance1
Understand the concept of inventory accounting: Inventory accounting involves tracking and valuing the costs associated with goods that are intended for sale. These costs are categorized into direct and indirect costs.
Define direct materials: Direct materials are raw materials that are directly used in the production of a finished product and can be easily traced to the product. For example, wood used in furniture manufacturing.
Differentiate between direct and indirect costs: Indirect costs, such as indirect labor and administrative expenses, are not directly traceable to the finished product. Selling costs are also considered period costs and are not part of inventory valuation.
Recognize the importance of direct materials in inventory accounting: Direct materials are a crucial part of the finished product because they are integral to its creation and are included in the cost of goods manufactured.
Conclude that direct materials are the correct answer: In the context of inventory accounting, direct materials are the costs that best describe crucial parts of the finished product.
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