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    Apr012013

    What is product cost?

    Product cost is the cost of direct labor, direct materials, consumable production supplies, and manufacturing overhead that are used to create a product. Product cost can also be considered the cost of the labor required to deliver a service to a customer. In the latter case, product cost should include all costs related to a service, such as compensation, payroll taxes, and employee benefits.

    The cost of a product on a unit basis is typically derived by compiling the costs associated with a batch of units that were produced as a group, and dividing by the number of units manufactured. The calculation is:

    (Total direct labor + Total direct materials + Consumable supplies + Total allocated overhead) / Total number of units

    = Product unit cost 

    Product cost can be recorded as an inventory asset if the product has not yet been sold. It is charged to the cost of goods sold as soon as the product is sold (see the Matching Principle), and appears as an expense on the income statement.

    Product cost appears in the financial statements, since it includes the manufacturing overhead that is required by both GAAP and IFRS. However, managers may modify product cost to strip out the overhead component when making short-term production and sale-price decisions (see Direct Costing). Managers may also prefer to focus on the impact of a product on a bottleneck operation, which means that their main focus is on the direct materials cost of a product and the time it spends in the bottleneck operation (see Throughput Topics).

    Similar Terms

    Product cost is also known as product unit cost.

    Related Questions

    What are direct costs?
    What is direct labor cost?
    What is direct material cost?

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    Reader Comments (3)

    Noting the article above, can product costs be classified according to a time frame perspective?

    June 29, 2012 | Unregistered CommenterWalter

    I'm not entirely sure what you mean by a time frame perspective. Certainly, the costs comprising a product will change over time, and so can be tracked on a trend line to show the changes.

    June 30, 2012 | Unregistered CommenterSteven Bragg

    Thanks. Re-read your article and understand it now. Just needed to go over it a second time.

    June 30, 2012 | Unregistered CommenterWalter
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