Multiple Choice
If you are managing inventory of finished goods, which inventory system provides a continuous record of inventory balances and cost of goods sold after each sale?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
Which of the following is NOT considered a product cost under both perpetual and periodic inventory systems?
A
Direct materials
B
Sales commissions
C
Factory rent
D
Direct labor
Verified step by step guidance1
Understand the concept of product costs: Product costs are costs that are directly associated with the production of goods. These typically include direct materials, direct labor, and manufacturing overhead (e.g., factory rent). These costs are capitalized as inventory and expensed as cost of goods sold when the goods are sold.
Recognize the difference between product costs and period costs: Period costs are costs that are not directly tied to the production process. These include selling, general, and administrative expenses, such as sales commissions, advertising, and office rent. Period costs are expensed in the period they are incurred.
Analyze the options provided: Direct materials, direct labor, and factory rent are all product costs because they are directly related to the production process. Sales commissions, however, are a selling expense and are considered a period cost.
Understand the treatment of costs under perpetual and periodic inventory systems: Both systems treat product costs the same way—they are included in inventory and expensed as cost of goods sold when the inventory is sold. Period costs, such as sales commissions, are not included in inventory under either system.
Conclude that sales commissions are NOT considered a product cost under both perpetual and periodic inventory systems because they are classified as a period cost.
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