Product Cost

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  Product costs are the costs allocated or the costs accumulated to create a product.  In general, Product costs will include direct labor, direct materials, consumable production supplies (MRO), and factory overhead.  A product cost is typically calculated on a single unit or on a batch of units and divided by the number of units manufactured.  This is why ordering in "bulk" or "batch" is often times more cost effective, because the cost of the batch is spread over the entire group rather than accumulated to one piece.  Keep in mind that product costs are initially recorded as inventory on a companies records.  Once the product is sold, it then becomes an expense (cost of goods sold).

Different Approaches to Product Costing:

• Throughput Costing.
• Life Cycle Costing.
• Variable Costing.
• Absorption costing sometimes referred to as full absorption costing.

Example:

• If we were manufacturing a car we would collect the total direct labor + total direct materials + any consumable supplies used to create the car + total allocated overhead.  The total amount would be the product cost of our car.  Please note that if we were producing a batch of cars the calculation is the same but we would divide the total product cost by the number of cars produced to get the per unit cost.

Challenge:

• What types of product costs can you think of? Share your thoughts in the comments section below and receive a coupon to one of Lean Strategies International LLC's courses.

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