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Which inventory system is more likely to result in inaccurate costing, such as undercosting standard products and overcosting specialty products, due to its reliance on periodic allocation of costs?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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Which of the following statements best describes how the cost of goods sold (COGS) is determined under the perpetual inventory system compared to the periodic inventory system?
A
COGS is unaffected by the choice between perpetual and periodic inventory systems.
B
Under both systems, COGS is only calculated at the end of the accounting period.
C
Under the perpetual system, COGS is updated continuously with each sale, while under the periodic system, COGS is calculated at the end of the period.
D
The perpetual system requires a physical inventory count to determine COGS, while the periodic system does not.
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Understand the concept of Cost of Goods Sold (COGS): COGS represents the direct costs attributable to the production of goods sold by a company, including materials and labor.
Learn the difference between the perpetual and periodic inventory systems: The perpetual inventory system continuously updates inventory records and COGS with each transaction, while the periodic inventory system updates inventory and calculates COGS only at the end of the accounting period.
Analyze the statement 'Under the perpetual system, COGS is updated continuously with each sale, while under the periodic system, COGS is calculated at the end of the period': This is correct because the perpetual system uses real-time tracking of inventory and sales, whereas the periodic system relies on a physical count and formula at the end of the period.
Evaluate the statement 'The perpetual system requires a physical inventory count to determine COGS, while the periodic system does not': This is incorrect because the perpetual system does not rely solely on physical counts for COGS; it uses continuous tracking. However, physical counts may still be performed for accuracy.
Conclude that the correct answer is: 'Under the perpetual system, COGS is updated continuously with each sale, while under the periodic system, COGS is calculated at the end of the period,' based on the operational differences between the two systems.
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