Question

Which of the following describes the flow of product costs in a manufacturing company?

1) 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.
2) Product cost are first accumulated in an expense account (Cost of Goods Sold) and then transferred to an asset account (Inventory) When the goods are sold.
3) Product costs are recorded in an expense account (Cost of Goods Sold) as the goods are being manufactured.
4) Product costs are never expensed.

Answer 1

The flow of product costs in a manufacturing company first accumulates costs as an asset in Inventory, which are then transferred to Cost of Goods Sold as an expense when products are sold.

Step-by-step explanation:

The correct option that describes the flow of product costs in a manufacturing company is: 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. This process reflects the accounting principle that expenses should be recorded in the period in which they help generate revenues. As a result, the product costs are initially treated as an asset (inventory) while the products are being manufactured or held for sale, and only when the products are sold, these costs are then expensed as the Cost of Goods Sold (COGS).

Manufacturers incur both fixed and variable costs when producing goods. Fixed costs, like rent on a factory space or depreciation on manufacturing equipment, remain constant regardless of production levels. Variable costs, on the other hand, fluctuate with production volume. However, both types of costs are included in the valuation of inventory and eventually expensed through COGS when sales occur.