Question

Which of the following statements is true of production costs considering the cost classification required for external reporting?

a. Production costs never appear on the balance sheet.
b. Production costs attached to the units not sold are reported as inventory on the balance sheet.
c. Production costs attached to the units not sold are recognized as an expense on the income statement.
d. Production costs attached to the units sold are reported as inventory on the balance sheet.

Answer 1

Production costs for units not sold are classified as inventory on the balance sheet, reflecting unsold goods and production costs as assets until the time of sale.

Step-by-step explanation:

Among the provided options, the statement that production costs attached to the units not sold are reported as inventory on the balance sheet is true of production costs considering the cost classification required for external reporting. This is in line with accounting principles which stipulate that production costs become part of the value of inventory until the goods are sold. At that point, these costs are transferred out of inventory and reported as the cost of goods sold on the income statement. Variable costs and fixed costs are the two components of production costs under consideration.