Question

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

a. Production costs attached to the units not sold are reported as inventory on the balance sheet.
b. Production costs attached to the units 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 never appear on the balance sheet.

Answer 1

The true statement about production costs for external reporting is that production costs attached to units not sold are reported as inventory on the balance sheet.

Step-by-step explanation:

When considering the cost classification required for external reporting:

• a. Production costs attached to the units not sold are reported as inventory on the balance sheet.
• b. Production costs attached to the units sold are reported as expenses on the income statement.
• c. Production costs attached to the units not sold are recognized as an expense on the income statement. This statement is incorrect because these expenses are not recognized until the product is sold.
• d. Production costs never appear on the balance sheet. This statement is incorrect because production costs do appear on the balance sheet, represented as inventory for unsold products.

Reported costs include both fixed costs, which do not change with the level of production, and variable costs, which are directly related to the production level. Variable costs exhibit diminishing marginal returns, meaning the cost of producing additional units increases.