Explanation

During inflation, prices rise, and later purchases cost more.

LIFO sells the latest (higher-priced) items first, increasing COGS.

It reducing net income, resulting in lower income taxes.

Explanation

Manufacturing overhead costs include indirect costs associated with production, such as:

• Depreciation of factory equipment (as in this question)
• Factory utilities
• Indirect labor
• Quality control costs
• Factory rent

Explanation

COGS (Cost of Goods Sold) is a critical component in calculating Gross Profit.

It is the difference between Net Sales and COGS.

Gross Profit = Net Sales - COGS

Explanation

Sales office rent is a period cost, which means it is an expense that is not directly related to the production or manufacturing process.

It is an administrative expense, and therefore not part of COGS (Cost of Goods Sold).

Explanation

In a period of rising prices, LIFO results in higher COGS.

Because the most recent (and more expensive) inventory is assumed to be sold first.

Explanation

The Average Cost method assigns the total cost of goods available for sale evenly across all units, so that each unit has the same cost.

This method is used when it is not possible to track the cost of individual units.

It is assumed that the cost of all units is average.

Explanation

COGS is calculated, reducing inventory value on the balance sheet.

Inventory (asset) decreases.

COGS (expense) is recorded on the income statement.

Net income (equity) decreases as a result of the COGS expense.

Explanation

• CEO salary is an administrative expense, not a direct cost of producing a product.

COGS (Cost of Goods Sold) includes only costs directly related to production, such as:

• Direct materials
• Direct labor
• Factory rent (or overhead costs)

Explanation

The Matching principle requires that expenses be matched with the revenues they help to generate.

In the case of COGS, this means matching the costs of producing and selling a product with the revenue generated from that product.

This principle ensures that the costs of generating revenue are properly reflected in the same period as the revenue.

Explanation

COGS (Cost of Goods Sold) is a direct cost associated with producing and selling a company's products or services.

It is listed on the income statement as a subtraction from revenue to calculate gross profit.