- Some of the goods manufactured are not sold in the same period in which they were produced.
- The goods not sold must be reported at their cost in the company's asset entitled Inventory.
- Accounting principles require that each product's inventory cost include both direct and indirect manufacturing costs.
- Indirect costs by definition mean they are not directly traceable to a product and will require an allocation.
- Some companies set their products' selling prices based on their costs. In the long run, the products' selling prices must be large enough to cover all of a company's manufacturing costs (including the indirect manufacturing costs) plus the company's selling, general and administrative expenses and a profit for the company's owners.
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