Product Cost
The total manufacturing costs assigned to a unit of output, including direct materials, direct labor, and manufacturing overhead.
What is Product Cost?
Product cost comprises all costs directly tied to the production of goods: direct materials (raw inputs consumed in manufacturing), direct labor (wages of workers who directly touch the product), and manufacturing overhead (indirect costs such as factory rent, depreciation of equipment, and utilities). Under accrual accounting, product costs are capitalized as inventory on the balance sheet and only flow to the income statement as cost of goods sold when the associated goods are sold. This differs from period costs — such as selling, general, and administrative expenses — which are expensed in the period incurred regardless of sales. The distinction is fundamental to both inventory valuation and profitability reporting under GAAP.
Example
A furniture manufacturer calculates product cost per chair as follows: $40 in lumber and fabric (direct materials), $25 in labor wages for assembly workers (direct labor), and $15 in allocated factory overhead for depreciation and utilities — totaling $80 per chair. Until the chair is sold, the $80 sits on the balance sheet as inventory. When sold for $150, the $80 flows to cost of goods sold, producing a gross profit of $70.
Source: FASB ASC 330 — Inventory