Which of the following statements best describes how the calculation of Cost of Goods Sold (COGS) differs between the perpetual and periodic inventory systems when performing cost-volume analysis?

• A. COGS is always higher under the perpetual system compared to the periodic system.
• B. In both systems, COGS is only calculated at the end of the accounting period.
• C. The perpetual system does not require tracking inventory purchases, while the periodic system does.
• D. In the perpetual system, COGS is updated continuously with each sale, while in the periodic system, COGS is determined at the end of the period.

Answer: (D)

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, including materials and labor costs.
2. Learn the difference between perpetual and periodic inventory systems: The perpetual system continuously updates inventory records and COGS with each transaction, while the periodic system updates inventory and calculates COGS only at the end of the accounting period.
3. Analyze how COGS is calculated in the perpetual system: In this system, every sale triggers an immediate update to COGS based on the cost of the items sold, ensuring real-time tracking of inventory and expenses.
4. Examine how COGS is calculated in the periodic system: In this system, COGS is determined at the end of the accounting period using the formula: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \). This requires a physical count of inventory to establish the ending inventory value.
5. Compare the timing of COGS calculation: The perpetual system provides continuous updates, making it more suitable for businesses requiring real-time inventory tracking, while the periodic system calculates COGS retrospectively, which may be simpler but less timely.