Under both the perpetual and periodic inventory systems, the costs of direct materials are classified as:

• A. Part of inventory until the goods are sold, then expensed as Cost of Goods Sold
• B. An immediate expense on the income statement when purchased
• C. A liability until the goods are sold
• D. A component of administrative expenses

Answer: (A)

Verified step by step guidance

1. Understand the classification of direct materials under inventory systems: Direct materials are initially recorded as part of inventory, which is an asset on the balance sheet.
2. Recognize the perpetual inventory system: In this system, inventory is continuously updated as purchases and sales occur. Direct materials remain part of inventory until the goods are sold.
3. Recognize the periodic inventory system: In this system, inventory is updated at the end of the accounting period. Direct materials are still classified as part of inventory until the goods are sold.
4. Understand the transition to Cost of Goods Sold (COGS): When the goods are sold, the cost of direct materials is transferred from inventory to COGS, which is an expense on the income statement.
5. Eliminate incorrect options: Direct materials are not immediately expensed when purchased, are not classified as liabilities, and are not part of administrative expenses. They are part of inventory until sold, then expensed as COGS.