Product costs, which flow through the inventory accounts until the goods are sold, are matched with sales on the Income Statement to determine the gross profit.
What are product costs?
Product costs are the costs of direct labor, direct and indirect materials, and factory overhead. They can also be the labor costs to deliver a service to a customer.
Thus, the flow of product costs through the various inventory accounts (raw materials, work in process, finished goods) are matched when the goods are sold or services delivered against the sales to determine the gross profit on the Income Statement.
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