The cost of finished goods inventory includes all but which of the following?

• A. Factory overhead costs
• B. Selling and administrative expenses
• C. Direct labor costs
• D. Direct materials used in production

Answer: (B)

Verified step by step guidance

1. Understand the concept of finished goods inventory: Finished goods inventory refers to the completed products that are ready for sale. The cost of finished goods inventory includes all costs incurred during production.
2. Identify the components of production costs: Production costs typically include direct materials, direct labor, and factory overhead costs. These are the costs directly associated with manufacturing the product.
3. Clarify the role of selling and administrative expenses: Selling and administrative expenses are not part of production costs. These are considered period costs and are expensed in the period they are incurred, rather than being included in the cost of inventory.
4. Compare the options provided in the question: Review each option to determine whether it is a production cost or a period cost. Direct materials, direct labor, and factory overhead are production costs, while selling and administrative expenses are period costs.
5. Conclude which cost is excluded from finished goods inventory: Based on the analysis, selling and administrative expenses are excluded from the cost of finished goods inventory because they are not directly related to the manufacturing process.