Product costs

Definition

Product costs are the costs incurred to create a product, which include direct materials, direct labor, and manufacturing overhead. These costs are capitalized as inventory until the product is sold, at which point they become part of the cost of goods sold.

5 Must Know Facts For Your Next Test

1. Product costs are recorded on the balance sheet as inventory until sold.
2. Direct materials and direct labor are easily traceable to each unit produced.
3. Manufacturing overhead includes all indirect costs associated with production.
4. In process costing, product costs are averaged over all units produced in a period.
5. Product costs differ from period costs, which are expensed in the period they are incurred.

Review Questions

• What components make up product costs?
• How are product costs treated on financial statements before and after the sale?
• What distinguishes product costs from period costs?

Related terms

Direct Materials:

Raw materials that can be directly traced to the production of a specific good.

Direct Labor:

Wages and salaries for employees who physically work on producing goods.

Manufacturing Overhead:

Indirect production costs that cannot be easily traced to specific products.