Final answer:
Product costs consist of direct labor, direct materials, and factory overhead and do not include sales and administrative expenses, which are period costs. Product costs are found on the balance sheet in inventory accounts until the products are sold. The false statement in the question is that product costs include sales and administrative expenses. So, the correct option is b. Product costs include sales and administrative expenses.
Step-by-step explanation:
When discussing product costs, we're referring to the costs that are directly tied to the production of goods. These costs include direct labor, which refers to the work of employees directly associated with manufacturing; direct materials, being the raw materials used in the creation of a product; and factory overhead, which encompasses all the other costs involved in running a factory that cannot be directly attributed to a specific product. These overhead costs could include utilities, depreciation on equipment, and rent for the production facility.
Fixed costs fall under the category of factory overhead and are characterized by remaining constant regardless of production levels in the short run. Examples of fixed costs are rent on a factory, the cost of machinery, and expenses like advertising. It's important to distinguish fixed costs from variable costs, which do change with the level of output. Variable costs often show diminishing marginal returns, implying that producing higher levels of output will result in increased marginal cost. The statement that product costs include sales and administrative expenses is false. Sales and administrative expenses are considered period costs, not product costs, and are expensed on the income statement in the period they are incurred rather than being included in the cost of goods sold on the balance sheet.
Product costs, which can be found in inventory accounts on the balance sheet, are capitalized as part of inventory and only expensed as the cost of goods sold when the product is sold. This explains why product costs are found on the balance sheet until they are sold. It's also worth noting that product costs can indeed be found across three accounts on the balance sheet: raw materials, work in process, and finished goods inventory. To summarize, the false statement regarding product costs is the one that includes sales and administrative expenses as part of product costs when instead, they are period costs.