Final answer:
In process costing, transferred-in goods are treated as a type of direct material for the subsequent process, acknowledging that they are essential components that have already been processed and are necessary for completing the final product.
Step-by-step explanation:
In process costing, transferred-in goods are treated as a type of direct material for the subsequent process. This designation recognizes that the transferred-in goods have already undergone some degree of processing in an earlier stage and are now being incorporated into a further stage of production. For instance, consider a multi-stage manufacturing process where the initial stage produces basic components that are then sent to the next stage for further assembly or refinement. These components that move from one stage to another are the transferred-in goods, regarded as direct materials because they are essential for the completion of the final product.
Transferred-in goods are distinct from work-in-process units, indirect materials, or equivalent units for the subsequent process. They have their value and costs attached while moving into the new process and usually include both direct materials and conversion costs from previous processes, which become part of the new product's total cost.