What is product cost?

Product cost is the cost of direct labor, direct materials, and manufacturing overhead that are consumed to create a product. Product cost can also be considered the cost of the labor required to deliver a service to a customer.

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).

Related Questions

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