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Which two costs would be used to calculate inventory overhead?

Rationale

Production employee benefits and factory electricity costs are used to calculate inventory overhead.

Inventory overhead includes all costs related to the production process that are not directly tied to the cost of goods sold but are necessary for production. Production employee benefits and factory electricity costs are both necessary expenses directly associated with the manufacturing process.

A (Production employee benefits) CORRECT

Production employee benefits are a direct cost associated with the workforce involved in manufacturing products. These benefits, such as health insurance and retirement contributions, are essential for the production process and thus are included in the calculation of inventory overhead.

B (Administrative employee benefits) YOUR ANSWER

Administrative employee benefits pertain to costs associated with staff not directly involved in the production process, such as management and administrative personnel. Since these costs do not contribute to the manufacturing of goods, they are not included in inventory overhead calculations.

C (Administrative office electricity costs) YOUR ANSWER

Similar to administrative employee benefits, administrative office electricity costs relate to the operation of non-production areas of a business. These expenses do not support the manufacturing process directly, making them irrelevant in calculating inventory overhead.

D (Factory electricity costs) CORRECT

Factory electricity costs are incurred as part of the manufacturing process and are necessary for production operations. This cost contributes to inventory overhead as it is directly linked to the functioning of the production facility.

Conclusion

Inventory overhead encompasses all costs related to the production of goods that are not directly attributable to specific units sold. In this context, production employee benefits and factory electricity costs are essential components of inventory overhead, while administrative costs do not contribute to the production process and are therefore excluded from these calculations. Understanding these distinctions is crucial for accurate inventory cost management.

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