Which inventory costing system is most likely to produce the least cost distortion when tracking the cost of goods sold?

• A. Periodic inventory system
• B. Weighted average system
• C. Perpetual inventory system
• D. Specific identification system

Answer: (C)

Verified step by step guidance

1. Understand the concept of inventory costing systems: Inventory costing systems are methods used to assign costs to inventory and calculate the cost of goods sold (COGS). Common systems include periodic inventory, perpetual inventory, weighted average, and specific identification.
2. Analyze the periodic inventory system: This system updates inventory records at the end of an accounting period. It may lead to cost distortion because it does not track inventory changes in real-time, making it less accurate for COGS calculations.
3. Evaluate the weighted average system: This system calculates the average cost of all inventory items and applies it to COGS. While it smooths out cost fluctuations, it may not reflect the actual cost of specific items, leading to potential distortions.
4. Examine the perpetual inventory system: This system updates inventory records continuously as transactions occur. It provides real-time tracking of inventory and COGS, reducing cost distortion and improving accuracy.
5. Consider the specific identification system: This system assigns the actual cost of each specific item to COGS. While highly accurate, it is only practical for businesses with unique or high-value items, as it requires detailed tracking of individual inventory items.