Final answer:
Product costs in a manufacturing company flow from being accumulated in the Inventory account, an asset, to being recognized as an expense in the Cost of Goods Sold account upon sale of the goods.
Step-by-step explanation:
The flow of product costs in a manufacturing company is described by the process where product costs are initially accumulated as part of an asset account named Inventory. Here, costs like raw materials, labor, and overhead are allocated to the products produced. These initial costs are not considered expenses during this phase. Rather, they remain as part of the value of the inventory on the balance sheet. As products are sold, the relevant costs are then transferred out of Inventory and into an expense account called Cost of Goods Sold (COGS). This transfer reflects the matching principle of accounting: expenses should be recorded in the period in which related revenues are realized. Consequently, it is when a product is sold that the associated product costs are expensed, affecting the company's profit calculations.
In summary, the correct answer to the flow of product costs is that product costs are first accumulated in an asset account and then transferred to an expense account upon sale of the goods. This accords with generally accepted accounting principles (GAAP) and reflects the movement of costs within a business's financial statements. Decisions on how to manage both fixed and variable costs will impact the efficiency with which a company converts expenses into revenues and profits.
C: Product costs are first accumulated in an asset account (Inventory) and then transferred to an expense account (Cost of Goods Sold) when the products are sold.