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    Product Cost

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    Product costs include direct materials, direct labor, and manufacturing overhead. Costs such as advertising, delivery expenses, office salaries, and rent are considered period expenses rather than product costs. To be profitable, a company's selling prices must cover both product costs and period expenses. Product costs are used for inventory valuation and determining cost of goods sold. Since some manufacturing overhead costs are fixed, the per unit product cost depends on the number of units produced.

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    Product Cost

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    mba department
    31 views2 pages
    Product costs include direct materials, direct labor, and manufacturing overhead. Costs such as advertising, delivery expenses, office salaries, and rent are considered period expenses rather than product costs. To be profitable, a company's selling prices must cover both product costs and period expenses. Product costs are used for inventory valuation and determining cost of goods sold. Since some manufacturing overhead costs are fixed, the per unit product cost depends on the number of units produced.

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    PRODUCT COST

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    Product costs include direct materials, direct labor, and manufacturing overhead. Costs such as advertising, delivery expenses, office salaries, and rent are considered period expenses rather than product costs. To be profitable, a company's selling prices must cover both product costs and period expenses. Product costs are used for inventory valuation and determining cost of goods sold. Since some manufacturing overhead costs are fixed, the per unit product cost depends on the number of units produced.

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    © All Rights Reserved
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    31 views2 pages

    Product Cost

    Uploaded by

    mba department
    Product costs include direct materials, direct labor, and manufacturing overhead. Costs such as advertising, delivery expenses, office salaries, and rent are considered period expenses rather than product costs. To be profitable, a company's selling prices must cover both product costs and period expenses. Product costs are used for inventory valuation and determining cost of goods sold. Since some manufacturing overhead costs are fixed, the per unit product cost depends on the number of units produced.

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    In accounting, we define the product cost as the direct material, direct labor, and manufacturing overhead.

    Costs
    such as advertising, preparing invoices, delivery expense, office salaries, office rent and utilities, and interest on
    loans are examples of expenses that are not considered to be product costs. Rather, these costs are expensed
    immediately to the period instead of being assigned to a product.
    To be profitable, a company must have its selling prices large enough to cover both the product costs of the units
    sold and the period expenses.
    The product cost is used for valuing the inventory and for determining the cost of goods sold. Since some of the
    manufacturing overhead costs are fixed in total (factory rent, factory depreciation, factory managers' salaries), the
    per unit cost of a product will depend upon the number of units manufactured during a given year. In other words,
    the cost of a product is not know with precision, even though accountants will compute the per unit cost to the
    nearest penny.

    Determining Product Costs and Other Costs in BusinessAll businesses that sell products must know their
    product costs — in other words, the costs of each and every item they sell. Companies that manufacture the products
    they sell — as opposed to distributors and retailers of products — have many problems in figuring out their product
    costs.Most production (manufacturing) processes are fairly complex, so product cost accounting for manufacturers is
    also fairly complex; every step in the production process has to be tracked carefully from start to finish.Many
    manufacturing costs cannot be directly matched with particular products; these are called indirect costs. To arrive at
    the full cost of each product manufactured, accountants devise methods for allocating indirect production costs to
    specific products. Surprisingly, generally accepted accounting principles (GAAP) provide very little authoritative
    guidance for measuring product cost. Manufacturing businesses have more than a little leeway regarding how to
    determine their product costs. Even businesses in the same industry — Ford versus General Motors, for example —
    may use different product cost accounting methods.

    Accountants determine many other costs, in addition to product costs:

     The costs of departments, regional distribution centers, and other organizational units of the business
     The cost of the retirement plan for the company’s employees
     The cost of marketing programs and advertising campaigns
     The cost of restructuring the business or the cost of a major recall of products sold by the business, when
    necessary

    Cost accounting serves two broad purposes: measuring profit and providing relevant information to managers for
    planning, control, and decision-making.The phrase actual cost often gets tossed around without a clear definition.
    An actual cost depends entirely on the particular methods used to measure the cost. Many arbitrary choices are
    behind every cost number you see. There’s no one-size-fits-all definition of cost, and there’s no one correct and
    “best-in-all-circumstances” method of measuring cost.The conundrum is that businesses need exact amounts for
    costs. In order to understand the income statement and balance sheet that managers use in making their decisions,
    they need to understand a little bit about the choices an accountant has to make in measuring costs. Some cost
    accounting methods result in conservative profit numbers; other methods boost profit, at least in the short run.

    PRODUCT COSTProduct costs in managerial accounting are those that are necessary to manufacture a product.
    Product costs equal the sum of your direct materials costs, direct labor costs and manufacturing overhead costs.
    Using the actual costing method, you can determine your small business’s overall product costs and product costs
    per unit based on the actual costs you incurred during a period. Knowing your product costs can help you price your
    products and budget your small business's money.

    Direct Materials
    Direct materials are the materials your small business uses to manufacture a product that you can trace directly to the
    product.

    Direct Labor:Direct labor costs are the total costs you incur to employ the workers that directly assemble or
    manufacture your products. These costs include wages, payroll taxes, pension contributions and
    contributions for life, health and worker’s compensation insurance. Add together these costs you incurred for
    the month to determine your total direct labor costs.

    Manufacturing Overhead:Manufacturing overhead costs are those necessary to making a product, but that
    you cannot trace directly to a specific product. Examples include indirect materials, such as masking tape,
    and indirect labor costs, such as the costs to employ a maintenance worker. Examples of other overhead costs
    are property taxes, rent and utilities. Add together each manufacturing overhead cost you incurred during
    the month to determine total manufacturing overhead costs.

    Product Cost and Product Cost per Unit Add together your total direct materials costs, your total direct
    labor costs and your total manufacturing overhead costs that you incurred during the period to determine
    your total product costs. Divide your result by the number of products you manufactured during the period
    to determine your product cost per unit. Using the numbers from the previous examples, add together
    $15,000, $3,200 and $5,000 to get $23,200 in total product costs. Assume you manufactured 200 bicycles
    during the same period. Divide $23,200 by $200 to get a product cost per unit of $116.

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