Which of the following groups of costs is the most accurate example of variable costs in the context of calculating Cost of Goods Sold under both perpetual and periodic inventory systems?

• A. Depreciation expense, administrative salaries, and office supplies
• B. Interest expense, advertising, and research & development costs
• C. Direct materials, direct labor, and sales commissions
• D. Factory rent, insurance, and property taxes

Answer: (C)

Verified step by step guidance

1. Understand the concept of variable costs: Variable costs are expenses that change in proportion to the level of production or sales activity. Examples include costs directly tied to production, such as direct materials and direct labor.
2. Review the components of Cost of Goods Sold (COGS): COGS typically includes direct costs associated with producing goods, such as direct materials and direct labor. These costs are variable because they fluctuate with production levels.
3. Analyze the options provided: Evaluate each group of costs to determine whether they are variable or fixed. Fixed costs, such as depreciation expense, factory rent, and property taxes, do not change with production levels, whereas variable costs like direct materials and direct labor do.
4. Focus on the correct answer: Direct materials, direct labor, and sales commissions are variable costs because they increase or decrease based on production or sales activity. These costs are directly tied to the production process and are included in COGS calculations under both perpetual and periodic inventory systems.
5. Relate the concept to inventory systems: Both perpetual and periodic inventory systems track COGS, but the method of tracking differs. Regardless of the system, variable costs like direct materials and direct labor are included in the calculation of COGS because they are directly tied to the production of goods.