In the context of inventory accounting, which of the following statements is TRUE regarding the treatment of manufacturing overhead costs in the calculation of Cost of Goods Sold under both perpetual and periodic inventory systems?

• A. Only direct materials and direct labor are included in Cost of Goods Sold; manufacturing overhead is always treated as a period expense.
• B. Manufacturing overhead is included in Cost of Goods Sold only under the periodic inventory system.
• C. Manufacturing overhead costs are included in Cost of Goods Sold under both perpetual and periodic inventory systems.
• D. Manufacturing overhead costs are excluded from Cost of Goods Sold in both systems.

Answer: (C)

Verified step by step guidance

1. Understand the concept of manufacturing overhead costs: These are indirect costs related to production, such as factory rent, utilities, and equipment depreciation. They are not directly traceable to specific units of production but are essential for manufacturing.
2. Review the components of Cost of Goods Sold (COGS): COGS includes direct materials, direct labor, and manufacturing overhead costs. These costs represent the total expense incurred to produce goods sold during a period.
3. Compare perpetual and periodic inventory systems: In both systems, manufacturing overhead costs are allocated to the cost of production and ultimately included in the calculation of COGS. The method of tracking inventory differs, but the treatment of manufacturing overhead remains consistent.
4. Clarify the incorrect statements: The first statement is incorrect because manufacturing overhead is not treated as a period expense; it is part of COGS. The second statement is incorrect because manufacturing overhead is included in COGS under both systems, not just the periodic system. The fourth statement is incorrect because manufacturing overhead is not excluded from COGS in either system.
5. Conclude with the correct statement: Manufacturing overhead costs are included in Cost of Goods Sold under both perpetual and periodic inventory systems, as they are integral to the total cost of production.