The functional classification is the cost classification required for external reporting. In preparing an income statement production and nonproduction costs are separated. The reason for the separation is that production costs are product costs – costs that are inventoried until the unit are sold – and the nonproduction costs of marketing and administration are viewed as period costs. Thus, production costs attached to the units sold are recognized as an expense (cost of goods sold) on the income statement. Production costs attached to units that are not sold are reported as inventory on the balance sheet. Marketing and administrative expenses are viewed as costs of the period and must be deducted each and every period as expenses on the income statement. Nonproduction costs never appear on the balance sheet.