What is a product cost?

Definition of a Retailer's Product Cost

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.

Definition of a Manufacturer's Product Cost

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

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

Since the manufacturing overhead costs are indirect costs, they must 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.

Product Costs Are Used for Inventory and Cost of Goods Sold

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.

SG&A Not Included in Product Costs

The selling, general, administrative (SG&A) and interest costs of a retailer and/or a manufacturer are not product costs. Rather, they are reported as expenses on the income statement of the accounting period in which they were incurred.