Product Cost

Product Cost
Product cost refers to the costs used to create a product.
Product cost can also be considered the cost of the labor
required to deliver a service to a customer.
These costs include
• Direct labor,
• Direct materials,
• Consumable
• Production supplies, and
• Factory overhead.
 How do you calculate product cost?
• Product Cost = Total materials costs +
Total labor costs + Total manufacturing
overhead costs
• Divide your result by the number of products
you manufactured during the period
to determine your product cost per unit.
• Product costs are sometimes broken out into
the variable and fixed subcategories
 Fixed Cost
• A fixed cost is a cost that does not change with
an increase or decrease in the amount of
goods or services produced or sold. Fixed
costs are expenses that have to be paid by a
company, independent of any business activity
Fixed costs often include rent, buildings, machinery, etc
 Variable Cost
• Variable costs are costs that vary with output.
Generally variable costs increase at a constant rate
relative to labor and capital. Variable costs may include
wages, utilities, materials used in production.
A variable cost is a that varies in relation to either
production volume or services provided. If there is no
production or no services are provided, then there
should be no variable costs. To calculate total variable
costs, the formula is
Total variable cost = Total quantity of units produced x Variable cost
per unit
 Total Product Cost

Rs
 Period Cost
• Period costs are general and administrative
expenses, such as rent, office depreciation,
office supplies, and utilities.
Period costs are not a necessary part of the manufacturing process.
 Period Costs
• Selling expenses
• Advertising expenses
• Travel and entertainment expenses
• Commissions
• Depreciation expense
• General and administrative expenses
• Executive and administrative salaries and benefits
• Office rent
• Interest for the money borrowed
 Product Cost Vs Period Cost
• Product costs are only incurred if products are
acquired or produced, and period costs are
associated with the passage of time. Thus, a
business that has no production or inventory
purchasing activities will incur no product
costs, but will still incur period costs.
 Profit / Volume

(P/V) ratio is calculated while studying the

profitability of operations of a business and to
establish a relation between Sales and
Contribution. It is one of the most
important ratios, calculated as under: P⁄V Ratio =
Contribution Sales. Fixed Expenses+Profit Sales.
Break Even Point