In the context of calculating Cost of Goods Sold (COGS) under both perpetual and periodic inventory systems, to whom are inventory costs most often allocated?

• A. Administrative staff
• B. Goods remaining in ending inventory
• C. Goods sold to customers
• D. Company shareholders

Answer: (C)

Verified step by step guidance

1. Understand the concept of Cost of Goods Sold (COGS): COGS represents the direct costs attributable to the production of goods sold by a company. It includes the cost of materials and labor directly used to create the goods.
2. Recognize the distinction between perpetual and periodic inventory systems: In a perpetual system, inventory records are updated continuously as transactions occur. In a periodic system, inventory records are updated at the end of an accounting period.
3. Identify the allocation of inventory costs: Inventory costs are allocated to either goods sold to customers (COGS) or goods remaining in ending inventory. This allocation is crucial for accurate financial reporting.
4. Understand why inventory costs are allocated to goods sold to customers: The costs associated with goods sold are recognized as an expense (COGS) on the income statement, reflecting the cost of generating revenue.
5. Clarify that inventory costs are not allocated to administrative staff or company shareholders: Administrative costs are classified as operating expenses, and shareholders are not directly involved in inventory cost allocation.