Product costs are manufacturing costs (all costs required to produce something). Depending on the state of production, product costs are recorded in one of three asses accounts (Raw Materials, Work in Process, Finished Goods) 1) If they are "costs" why are they recorded in asset accounts and not expense accounts?

2) Do these product costs ever become an expense to the company?

Question

Gigi

Business

1 April, 11:27

Product costs are manufacturing costs (all costs required to produce something). Depending on the state of production, product costs are recorded in one of three asses accounts (Raw Materials, Work in Process, Finished Goods) 1) If they are "costs" why are they recorded in asset accounts and not expense accounts?

2) Do these product costs ever become an expense to the company?

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Answers (1)

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Carissa Beard · Answer 1

The answer of each requirement is given below.

If they are "costs" why are they recorded in asset accounts and not expense accounts?

These cost are future expense. As per accounting rules expense is recorded against any purchase when benifit from it is taken, The benifit from stock is taken when it is sold. So RM, WIP and FG are cost accounted as asset as they are still in pipeline and is to be sold in future.

2) Do these product costs ever become an expense to the company?

Yes, these cost become expenses when final goods are sold. Untill sale they are company asset, as asset is something from which future economic benifit is to taken or derived.