Question

Which of the following statements is correct?

1) The overhead charged to inventory at the balance sheet date can be understated if the salaries of administrative personnel are inadvertently or intentionally charged to indirect manufacturing overhead.
2) When jobs are billed on a cost-plus basis, revenue and total expenses are both affected by charging labor to incorrect jobs.
3) Payroll is a significant portion of inventory for retail and service industry companies.
4) The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged to the wrong job or process.

Answer 1

The statement that is correct is the fourth, which asserts that inventory valuation on the balance sheet is affected when direct labor costs are misallocated. Incorrect allocation of labor can result in incorrect inventory valuation, affecting COGS and company profit.

Step-by-step explanation:

The correct statement among the given options is: 4) The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged to the wrong job or process. When labor costs are allocated incorrectly, it can cause inaccuracies on the balance sheet as the inventory is shown at an incorrect value. Details like the cost of labor are critical for precise inventory valuation because they directly affect the cost of goods sold (COGS) and, consequently, the company's gross profit.

Statement 1 is incorrect because administrative personnel salaries should not be charged to indirect manufacturing overhead, so this would not be an understatement of inventory but rather an allocation error. Statement 3 is not typically correct because payroll would generally not be considered part of inventory in retail and service industries. As for Statement 2, when jobs are billed on a cost-plus basis, indeed, an incorrect labor charge would affect both revenue and expenses.

It's important to have accurate labor cost allocations as it influences inventory valuation on the balance sheet, decision-making, and the financial stability of a company.