CFA Practice Question

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CFA Practice Question

Which one of the following is a product cost?

A. Advertising
B. Merchandise inventory
C. Utilities expense in an office building
D. Salaries of personnel department staff
Correct Answer: B

A firm sells merchandise inventory to customers. As the costs of inventory directly relate to sales, the cost of merchandise inventory is a product cost.

User Contributed Comments 13

User Comment
Bibhu Could anyone please explain under which cost other choices are included?
pierreE14 Hi Bibhu
A & D are direct costs. They can directly be attibuted to a specific good/service during a costing process
C is just an overhead or indirect cost, you cannot directly allocate the full amount of this cost to only one product (just like admin expences). You need to allocate a share of this cost on a fair basis. (ex: activity based costing method)

I hope it helps to understand that B was the only possible answer
Cheers ;)
janetse Still don't understand why A&D is not a product cost... can anyone elaborate further?
pranit Hi Janetse
B is COGS - manufacturing cost
Maxo Hi janetse,
A&D are not a product cost because they are not part of manufacturing they incure after the manufacturing process.
lexology A, C, D shld be considered as operating expenses, you are not able to quantitatively allocate to each product or services sold.
miene I think the answer relates to inventory costs. Costs excl. from inventory are admin. costs, advertising costs & cost for stockage. Which leaves us with Answer B, which is not excl. from inventory costs (as per definition)
got2pass product costs are the costs directly related in making a product. for example, the product cost of making furniture would be the fabric, wood, nails, etc. not the labor...this is overhead.
Joefara Salaries of staff engaged in the manufacturing process form part of product cost. Salaies for personnel department will not becuase personnel department plays a supportative role.
bms65 here the question ask us about product cost?, not any other cost.... admin or cogs. storing inventory is cost to company. "advertising is selling & distribution exp. " C & D" are adminstration exp
nayagan Does salaries specifically fall under Sales, General or Administrative expenses? For all intensive purposes, does it matter?
boddunah inventory cost:
1.invoice cost
2.product conversion cost
3.normal overhead cost based on normal capacity of firm.
cost incurred in bringing products to present condition or location. costs(that are required for production process)
period costs:below
admini. costs
advertising costs
selling costs
JJiang Product costs are capitalized in the Inventories account on the Balance Sheet
*Purchase cost - Trade Discounts - Rebates
*Conversion costs (Labor & Overhead)
*Other costs necessary to get inventory to its present location and condition.
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