Diabelli Inc. is a manufacturing company that is operating at normal capacity levels. Which of the following inventory costs is most likely to be recognized as an expense on Diabelli’s financial statements when the inventory is sold? A) Administrative overhead. B) Selling cost. C) Allocation of fixed production overhead. ************* Explanation given… ************* Answer given is C Assuming normal capacity levels, allocation of fixed production overhead is a product cost that is capitalized as part of inventory. Administrative overhead and selling costs are period costs that must be expensed in the period incurred. Question : Answer will be C if the question was “least likely” ?
Ok the question could have been clearer, but it is asking what costs are included in COGS when inventory is sold. Administrative overhead and selling costs are both expenses in General Selling & Administrative Expense in the period incurred. Allocation of fixed overhead is capitalized into inventory. When that inventory is sold, it is expensed along with the other inventory expenses (raw materials, direct labor, etc.) in Cost of Goods Sold. I think it was just bad wording of the question though. It says which of the following inventory costs…" and allocation of fixed production overhead is the only actual inventory cost.