In financial accounting, which of the following costs is typically included in Cost of Goods Sold (COGS) for a merchandising company?

• A. Selling expenses such as advertising, sales commissions, and delivery costs to customers (freight-out).
• B. The cost of inventory items that were sold during the period (e.g., purchase price plus freight-in, net of purchase discounts).
• C. Administrative expenses such as office salaries, accounting fees, and utilities for headquarters.
• D. Interest expense on loans used to purchase inventory.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the definition of Cost of Goods Sold (COGS). COGS represents the direct costs attributable to the production or purchase of the goods that a company sells during a specific period.
2. Step 2: Identify the types of costs that are directly related to acquiring or producing inventory. These typically include the purchase price of inventory, freight-in (shipping costs to bring inventory to the company), and any purchase discounts that reduce the cost.
3. Step 3: Recognize that selling expenses such as advertising, sales commissions, and freight-out (delivery costs to customers) are not included in COGS because they are considered operating expenses related to selling activities, not the cost of acquiring inventory.
4. Step 4: Understand that administrative expenses like office salaries, accounting fees, and utilities for headquarters are also excluded from COGS because they are general overhead costs not directly tied to inventory.
5. Step 5: Note that interest expense on loans used to purchase inventory is a financing cost and is not included in COGS; it is reported separately as an interest expense on the income statement.