CPIM Practice Exam

Which accounts are primarily involved when calculating COGS?

1. Assets and Liabilities

2. Revenue and Expenses

3. Direct Materials, Direct Labor, and Allocated Overhead

4. Sales and Accounts Receivable

The correct answer is: Direct Materials, Direct Labor, and Allocated Overhead

The calculation of Cost of Goods Sold (COGS) primarily involves Direct Materials, Direct Labor, and Allocated Overhead. COGS reflects the direct costs attributable to the production of the goods that a company sells within a given period. Direct Materials refer to the raw materials that are used to create the product. Direct Labor includes the labor costs incurred to manufacture the goods, which are directly tied to production. Allocated Overhead consists of the indirect costs associated with the production process, such as utilities, depreciation of equipment, and rent for the manufacturing facility. These components collectively contribute to understanding the total cost incurred to bring a product to market, making them essential for calculating COGS accurately. This understanding is vital for financial reporting and assessing the profitability of a company’s operations since COGS directly influences gross profit and ultimately net income. Other options involve elements that are either more general financial categories (like Revenue and Expenses) or not directly related to production costs.