Which cost is a product cost for Synesthor, a company that manufactures headphones?

• A. Wages paid to the headphone assemblers who work on the production line
• B. Advertising expense
• C. Rent for the corporate office
• D. Shipping costs to customers

Answer: (A)

Product costs are the costs tied to making the product and are recorded as inventory until the product is sold. Wages paid to the headphone assemblers on the production line are direct labor, a key part of manufacturing costs. Because these wages are incurred to produce the headphones, they are considered a product cost and are included in inventory (cost of goods manufactured) and later in cost of goods sold when the product is sold.

Advertising expense, on the other hand, is a selling expense and not tied to producing inventory. Rent for the corporate office is an administrative expense, also not a product cost. Shipping costs to customers are part of distribution or selling expenses (freight-out) and are expensed as incurred rather than capitalized in inventory.