Product Cost
The overall cost required to create a product or service for sale intend is known as product cost. Product costs include direct materials, direct labor, and manufacturing overhead. In the case of retail business, the cost required to purchase supplies from suppliers and other costs involved to bring the goods or services to the market would come in product cost.
It is essential to record the product cost in a business financial statement. Since product cost expenses include manufacturing overhead, both the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) require the disclosure of these costs in individual or company financial statements. But the manager may ignore overhead costs while making short-term sales price and production decisions. On the other side, the manager may focus on the direct material cost of the product and the time it spends in a bottleneck operation.
Table of Contents
how to calculate production cost per unit
product cost examples
Types of cost production
What is period VS product cost?
Why is it important to differentiate between product and period costs?
What is the product cost formula?
The formula to calculate the product cost is to add these 3 costs which are direct material cost, direct labor cost, and factory overhead cost.
Product Cost = Direct Labor + Direct Material + Factory Overheads
Factory OH = Indirect Labor + Indirect Material + Other Factory OH
How to calculate product cost per unit?
To calculate product cost per unit just simply divided the overall product cost which we discussed above by the Number of Units Produced by a company.
Per unit cost = Cost per unit of the product (Total Product Cost) / Number of Units Produced
product cost examples
1. Research and Development cost: This is the cost that business spends on market research and development of a product.
2. Manufacturing cost: This cost consists of Labor cost, raw materials cost, overhead cost, and other costs that are associated to obtain the end product.
3. Shipping cost: this is the cost of shipping the product or service from the manufacturer to the customer.
Example: 1
Suppose, there is a t-shirt company that makes 500 t-shirts by spending $1000 on market ( R&D ) research and development, $15,000 on manufacturing, and $500 on advertising. Additionally, spend $200 on shipping the t-shirt to the customer.
In this condition, the overall product cost of 500 t-shirts = $1000 ( R&D )+ $15,000 ( Manufacturing ) + $500 ( Advertising ) +$200 ( shipping ) = $16,700. The cost per unit is $33.4 ( $16,700/500 = $33.4 ).
Example: 2
There is a wholesaler who purchases 50 phones from a company at $1,000,000 and sells them to a retailer and the cost to sell those phones is $100 ( transport cost ).
Here, the total product cost = $1,000,000 ( purchasing cost )+ $100 ( transport cost ) = $1,000,100. The cost per unit is $20,002.
Types of cost production
There are various types of cost products some of them are:
1. Fixed cost: The cost which is fixed and not affected by the volume of products. Such as company rent, property tax, insurance, etc.
2. Variable cost: These are the Cost that varies from product to product. For instance: A furniture company makes a chair at $50 and a bed at $200.
3. Direct cost: The cost that a company spends on Labor and raw materials to obtain the finish or end product.
4. Overhead cost: The cost which is not directly related to product creation but essential to run a business comes under overhead cost. Such as electricity cost, maintenance cost, etc.
Read also = 8 ways on How small businesses can reduce costs and increase revenue or profit in 2023
What is period VS product cost?
| Product cost | Period cost |
|---|---|
| The cost incurred in creating a product or service is known as product cost. | The cost that is incurred and recorded after some specific period (such as a month or a year) is known as period cost. |
| Examples: raw materials cost, labor cost, manufacturing overhead. | Examples: advertising cost, rent cost, and audit fee. |
| Product cost varies from product to product | Period costs is generally fixed |
| Product cost is generally manufacturing in nature. | Period cost is generally non-manufacturing in nature. |
| Product cost is directly related to the product | Period cost is not directly related to the product |
Why is it important to differentiate between product and period costs?
It is important to differentiate between product and period costs because It helps a business to manage their finance in a much more effective way. If the businesses don't separate these costs. Then, They never identify from where they get profits and losses.
For instance: A business owner spends $500 monthly on rental property and he finds another rental property whose monthly cost is $350. Here he can save $150 Monthly and $1,800 annually if he buys that second property on rent. Here the business owner can get a profit from the period cost.
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What is a period cost in simple words?
The cost which does not involve directly product creation but indirectly involves product creation is known as period cost.
What are the 3 types of product costs?
The 3 types of product costs are:
1. Direct material cost: The cost which a company spends on raw materials to create a product is Direct material cost.
2. Direct labor cost: The cost a company spends on Labor that is directly associated with product creation is known as Direct labor cost.
3. Manufacturer overhead cost: The cost which is not directly associated with product creation such as rent, insurance, and taxes are manufacturing overhead costs.
Is depreciation a product cost
Yes, depreciation is a product cost because it is considered that depreciation is directly related to product or service creation.
What is product cost and product price?
The product cost is the total amount cost company spends on creating a product and the product price is the price that customers can pay for the product to the company.
What is the by-product cost?
The cost which occurs when the service or product is completed is known as by-product cost. For example the cost of disposing of waste, the cost of maintenance, and the cost of storage.
Where are product costs reported?
The product costs are reported on a balance sheet in an asset column and reported as an expense in the income statement of a company.
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