What Are Product Costs?
Product costs are all those costs associated with manufacturing a product. [For those companies that don’t make the products they sell such as retailers product costs are limited to the cost of purchasing inventory]. They include the cost of: • Raw Materials • Labor • Variable Overhead (such as electricity) • Fixed Overhead (such as rent) Unit Costs So how do companies determine how much it costs to make a product? For starters, they take the actual amount of money required to manufacture a product and divide that figure by the number of units they produce. Seems simple enough: Unit Costs = Total Manufacturing Costs / Numbers of Units Produced For instance, in our example, Lie Dharma Shoe spent $365,000 making loafers last year, as shown in the table below: Loafers Boots Raw materials $200,000 $300,000 Labor 100,000 100,000 Overhead variable 25,000 35,000 Overhead fixed 40,000 40,000 Total manufacturing costs: $365,000 $475,000 Units made 14,000 15,500 With that money, it made 14,000 l
