Costs incurred by a firm in actually producing a product are considered to be a part of cost of goods sold.

• A. True
• B. False
• C. Sometimes
• D. Never

Answer: (A)

Costs incurred to actually produce goods are included in cost of goods sold because COGS reflects the expense tied to the goods that were sold during the period. The production costs—materials, labor, and overhead—are attached to the units that leave inventory through a sale, so they’re expensed as COGS when those units are sold. If some produced units aren’t sold yet, their costs stay on the balance sheet as inventory and only move to COGS when the sale occurs. This alignment with the revenue from the sold goods illustrates the matching principle. For example, if you manufacture 100 units at a total cost of $1,000 and sell 60 units, COGS would be $600, while the remaining $400 stays in finished goods inventory until those units are sold.