Question

Which of the following statements is TRUE about product costs?

Multiple Choice

A. Product costs are reported only on the balance sheet.

B. Product costs are reported only on the income statement.

C. Product costs are reported on the balance sheet before goods are sold, and on the income statement after goods are sold.

D. Product costs are reported on the income statement before goods are sold, and on the balance sheet after goods are sold.

Answer 1

Product Cost

It is the total cost used for producing a product. It is also understood as the cost required for conversion of inputs into outputs. It include the costs to manufacture products or to purchase products.

Product costs are recorded as an asset on the balance sheet until the products are sold, at which point the costs are recorded as an expense on the income statement. To record product costs as an asset, accountants use one of three inventory accounts: raw materials , work-in-process , or finished goods. The account they use depends on the product’s level of completion. They use one expense account,cost of goods sold to record the product costs when the goods are sold.

Three types of inventory accounting is as follows:-

Raw Materials

The raw materials inventory account records the cost of materials, which are purchased but not yet used in  production.

Work in Process

The work-in-process (WIP) inventory account records the costs of products that have not yet been completed. All manufacturing costs associated with these incompleted items such as direct materials, direct labor, and manufacturing overhead are included in the WIP inventory account.

Once goods in WIP inventory are completed, they are transferred into finished goods inventory. The cost of completed goods that are transferred out of WIP inventory into finished goods inventory is called the cost of goods manufactured.

Finished Goods

The finished goods inventory account records the manufacturing costs of products that are completed and ready to sell.

When completed goods are sold, their costs are transferred from finished goods inventory account into the cost of goods sold account. Cost of goods sold is an expense account on the income statement that represents the product costs of all goods sold during the period.

Summary - Recording the Product Costs in Accounting:-

Account Name/Ledger	Description	Financial Statement
Raw materials inventory	Cost of unused production materials	Balance sheet (asset)
Work-in-process inventory	Cost of incomplete products	Balance sheet (asset)
Finished goods inventory	Cost of completed products not yet sold	Balance sheet (asset)
Cost of goods sold	Cost of products sold	Income statement (expense)

Thus Option C. Product costs are reported on the balance sheet before goods are sold, and on the income statement after goods are sold is correct, and other options are incorrect.