Which of the following statements about product costs is true?
A. Product costs are deducted from revenue when the production process is completed.
B. Product costs are deducted from revenue as expenditures are made.
C. Product costs associated with unsold finished goods and work in process appear on the balance sheet as assets.
D. Product costs appear on financial statements only when products are sold.
The correct answer and explanation is :
The correct answer is:
C. Product costs associated with unsold finished goods and work in process appear on the balance sheet as assets.
Explanation:
Product costs are the costs incurred in manufacturing a product. These include direct materials, direct labor, and manufacturing overhead. Unlike period costs (such as selling and administrative expenses), product costs are initially recorded as inventory on the balance sheet rather than being expensed immediately.
- Product Costs and Inventory:
When a company produces goods, the costs associated with raw materials, labor, and factory overhead are accumulated as inventory costs. If some of these goods remain unsold at the end of an accounting period, they are classified as assets on the balance sheet under “Inventory.” - Recognition on the Income Statement:
Product costs do not appear on the income statement until the inventory is sold. Once sold, these costs become part of the cost of goods sold (COGS) and are deducted from revenue to determine gross profit. - Incorrect Answer Explanations:
- (A) Incorrect: Product costs are not deducted when production is completed. Instead, they remain as assets until the goods are sold.
- (B) Incorrect: Product costs are not deducted as expenditures are made; they are capitalized as inventory and expensed when the product is sold.
- (D) Incorrect: While product costs do appear on financial statements when products are sold (as COGS), they also appear on the balance sheet as inventory if they are not sold.
Thus, statement C is correct because product costs associated with unsold inventory remain as assets on the balance sheet until they are sold.
