Which of the following costs are not included in finished goods inventory?
- Factory Overhead
- Direct Labor
- Direct Materials
- Company president’s salary.
Answer to this question is option D which is company president salary.
Finished goods inventory contains only direct costs. Direct costs are those costs which can be directly attributed to the cost of finished goods. As we can see, option A “factory overhead” is directly attributable to the finished goods inventory.
Similarly, option B which is direct labor is directly attributable to finished goods inventory.
The same goes with option C which states direct materials. Direct materials are also direct costs.
Now, we are left with only one option i.e. option D which which says “company president salary”. It is in Admin expense. It should be charged to profit and loss under admin expenses. It has no direct relationship with finished goods inventory so it should not be included in the cost of finished goods inventory.
we study 2 types of costs in cost accounting. These are direct costs and indirect costs. Direct costs are those costs that are directly attributable to the cost of the product. Example of direct costs are materials, labours, overheads (these are the type of costs that can be directly attributed to the cost of the product.)
Now the key question here is how we know if a cost is directly attributable to the cost of the product or not.
I’m giving you a hint here. If you think that this particular cost would not have occurred if we weren’t producing that particular product then this means that this is a direct cost because this cost is occurring solely for the product being manufactured. As you can see, direct labor, direct materials and Factory Overheads are incurred because we are producing a particular product. But as for the company president salary, if this product wasn’t being manufactured we would have incurred that cost anyhow.