Audit and Assurance Practice Exam

What would increased efficiency in a manufacturing process typically indicate about the cost of goods sold?

1. It is expected to decrease

2. It is expected to increase

3. It would remain the same

4. It would become unpredictable

The correct answer is: It is expected to increase

Increased efficiency in a manufacturing process generally indicates that the production of goods is becoming more streamlined, involving less waste of resources, reduced energy consumption, and improved use of labor and materials. As a result, the cost of goods sold (COGS)—which represents the direct costs attributable to the production of the goods sold by a company—is typically expected to decrease. When manufacturing processes become more efficient, companies can produce the same amount of goods with lower resource consumption, which translates to reduced costs per unit. This means that for each product sold, the costs related to production—such as raw material expenses, labor, and overhead—are lower, which is a direct benefit affecting the COGS. A situation where COGS increases would be counterintuitive in the context of increased efficiency, as it would suggest that despite improvements in production processes, costs are rising, potentially due to external factors or inefficiencies elsewhere. If the efficiency remains constant, it is reasonable to expect COGS would not change significantly, but efficiency improvements generally aim at reducing those costs, hence the expectation of a decrease is aligned with manufacturing principles focused on cost reduction. Unpredictable costs would also not typically result from efficiency; rather, they suggest volatility or lack of control in