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What is a product cost?

Product cost meaning: In accounting, a retailer’s product cost is the cost paid to a supplier plus any other costs that are necessary to get the product in place and ready for sale. For example, if a retailer pays $40 to its supplier and then pays $10 to get it delivered to its warehouse, the retailer’s product cost is $50. (Other costs such as the selling, general, administrative and interest costs are not product costs. Instead these are period costs since they are expensed in the accounting period in which they occur.)

A manufacturer’s product cost includes the cost of each product’s raw materials plus the costs of converting those raw materials into the product. The manufacturer's product costs are often classified into three groups:

  • Raw materials used in the product
  • Direct labor used to make the product
  • manufacturing overhead incurred to make the product

A manufacturer's selling, general, administrative and interest costs are not product costs and will be expensed in the accounting period in which they are incurred.

Both the product costs of a retailer and the product costs of a manufacturer are also referred to as inventoriable costs, since the product costs are used to value their goods in inventory. When the goods are sold, the product costs will be removed from inventory and will appear on the income statement as the cost of goods sold.

Examples of manufacturing overhead costs: The following are some examples of a manufacturer’s overhead costs, which are also referred to as indirect manufacturing costs:

  • Gas and electricity used in the production facilities
  • Repairs and maintenance of the production equipment and buildings
  • Indirect factory workers' compensation
  • Depreciation of the manufacturing equipment and buildings
  • Manufacturing supplies, quality assurance, etc.

Since the manufacturing overhead costs are indirect costs, they need to be allocated to the products manufactured to comply with financial accounting standards and U.S. income tax regulations. The details for allocating or assigning the manufacturing costs to the products manufactured are contained in the college course known as cost accounting or managerial accounting.