Under a periodic inventory system, which formula is used to compute the cost of direct materials used for the current year?

• A. Beginning Raw Materials Inventory + Purchases - Ending Raw Materials Inventory
• B. Beginning Finished Goods Inventory + Purchases - Ending Finished Goods Inventory
• C. Cost of Goods Available for Sale - Cost of Goods Sold
• D. Net Sales - Gross Profit

Answer: (A)

Verified step by step guidance

1. Understand the periodic inventory system: In this system, inventory is updated at the end of the accounting period rather than continuously. This means that the cost of direct materials used is calculated based on inventory changes and purchases during the period.
2. Identify the formula for calculating the cost of direct materials used: The correct formula is 'Beginning Raw Materials Inventory + Purchases - Ending Raw Materials Inventory'. This formula accounts for the raw materials available at the start of the year, adds any purchases made during the year, and subtracts the raw materials still on hand at the end of the year.
3. Break down the components of the formula: 'Beginning Raw Materials Inventory' represents the raw materials available at the start of the year. 'Purchases' refers to the raw materials bought during the year. 'Ending Raw Materials Inventory' represents the raw materials still available at the end of the year.
4. Apply the formula conceptually: To compute the cost of direct materials used, you are essentially determining how much raw material was consumed during the year. This is done by adding the starting inventory and purchases, then subtracting the ending inventory.
5. Compare the formula to the other options provided: The other formulas listed (e.g., 'Beginning Finished Goods Inventory + Purchases - Ending Finished Goods Inventory') pertain to different calculations, such as finished goods inventory or cost of goods sold, and are not relevant to direct materials used under a periodic inventory system.