Costs incurred in manufacturing a product Show
What are Product Costs?Product costs are costs that are incurred to create a product that is intended for sale to customers. Product costs include direct material (DM), direct labor (DL), and manufacturing overhead (MOH). Understanding the Costs in Product CostsProduct costs are the costs directly incurred from the manufacturing process. The three basic categories of product costs are detailed below: 1. Direct materialDirect material costs are the costs of raw materials or parts that go directly into producing products. For example, if Company A is a toy manufacturer, an example of a direct material cost would be the plastic used to make the toys. 2. Direct laborDirect labor costs are the wages, benefits, and insurance that are paid to employees who are directly involved in manufacturing and producing the goods – for example, workers on the assembly line or those who use the machinery to make the products. 3. Manufacturing overheadManufacturing overhead costs include direct factory-related costs that are incurred when producing a product, such as the cost of machinery and the cost to operate the machinery. Manufacturing overhead costs also include some indirect costs, such as the following:
Example of Product CostsCompany A is a manufacturer of tables. Its product costs may include:
Company A produced 1,000 tables. To produce 1,000 tables, the company incurred costs of:
Total product costs: $12,000 (direct material) + $2,000 (direct labor) + $100 (indirect material) + $500 (indirect labor) + $500 (other costs) = $15,100. As this is the cost to produce 1,000 tables, the company has a per unit cost of $15.10 ($15,100 / 1,000 = $15.10). Period CostsProduct costs are costs necessary to manufacture a product, while period costs are non-manufacturing costs that are expensed within an accounting period.
Consider the diagram below: Costs on Financial StatementsProduct costs are treated as inventory (an asset) on the balance sheet and do not appear on the income statement as costs of goods sold until the product is sold. For example, a company manufactures 50 units of widgets at a unit product cost of $5. On the balance sheet, there would be a $5 x 50 = $250 increase in inventory. If the company sells 20 units of widgets, $5 x 20 = $100 in inventory would be transferred to the cost of goods sold on the income statement while the remaining $150 would remain in inventory on the balance sheet. Download the Free TemplateEnter your name and email in the form below and download the free template now! Product Costs TemplateDownload the free Excel template now to advance your finance knowledge! More ResourcesThank you for reading CFI’s guide on Product Costs. To keep learning and advancing your career, the following resources will be helpful:
Which of the following would be included in the cost of a product manufactured?In general, three types of expenses are included in the cost of products: the cost of direct materials, direct labor costs and manufacturing overhead costs.
Which of the following would be included in the cost of a product manufactured according to absorption?Under absorption costing, the cost of finished goods includes direct materials, direct labor, and all factory overhead.
Which of the following would be included in the cost of a product manufactured according to variable?The variable costs that are included as product costs are the following: Direct Materials. Direct Labor. Variable Factory Overhead.
Which of the following costs at a manufacturing company would be treated as a product cost under both?Under the variable costing method, only the variable cost to produce is considered as a product cost. All other costs incurred will be treated as period costs. A product cost is capitalized as an inventory cost while a period cost is expensed outright.
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