Regardless of the system used in departmental cost analysis, which of the following statements is true about the calculation of Cost of Goods Sold (COGS)?

• A. COGS does not require consideration of beginning inventory.
• B. COGS is always calculated using the perpetual inventory system.
• C. COGS is unaffected by inventory shrinkage or losses.
• D. COGS is ultimately determined by the physical count of inventory at period end.

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. It includes the cost of materials and labor directly used to create the product.
2. Recognize the role of inventory in COGS calculation: COGS is calculated using the formula: \( \text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} \). This formula highlights the importance of beginning inventory and ending inventory in determining COGS.
3. Consider the impact of inventory systems: While COGS can be calculated using either the perpetual or periodic inventory system, the perpetual system continuously updates inventory records, whereas the periodic system relies on a physical count at the end of the period.
4. Account for inventory shrinkage or losses: Inventory shrinkage (losses due to theft, damage, or errors) affects the physical count of inventory, which in turn impacts the ending inventory value and ultimately the COGS calculation.
5. Understand the importance of physical inventory count: Regardless of the inventory system used, the physical count of inventory at the end of the period is crucial for determining the ending inventory value, which directly influences the calculation of COGS.