Product costs in managerial accounting are those that are necessary to manufacture a product. Product costs equal the sum of your direct materials costs, direct labor costs and manufacturing overhead costs. Using the actual costing method, you can determine your small business’s overall product costs and product costs per unit based on the actual costs you incurred during a period. Knowing your product costs can help you price your products and budget your small business’s money.
Direct materials are the materials your small business uses to manufacture a product that you can trace directly to the product, such as the bicycle tires on a specific bicycle. Add together the costs of the direct materials you used over a particular period, such as one month, to determine your total direct materials costs. For example, assume you make bicycles. If you used $10,000 in bicycle tires and $5,000 in other bicycle parts during a month, add $10,000 to $5,000 to get $15,000 in total direct materials costs.
Direct labor costs are the total costs you incur to employ the workers that directly assemble or manufacture your products. These costs include wages, payroll taxes, pension contributions and contributions for life, health and worker’s compensation insurance. Add together these costs you incurred for the month to determine your total direct labor costs. For example, if you paid $2,000 in wages, $200 in payroll taxes and $1,000 toward pensions and insurance, add together $2,000, $200 and $1,000 to get $3,200 in total direct labor costs.
Manufacturing overhead costs are those necessary to making a product, but that you cannot trace directly to a specific product. Examples include indirect materials, such as masking tape, and indirect labor costs, such as the costs to employ a maintenance worker. Examples of other overhead costs are property taxes, rent and utilities. Add together each manufacturing overhead cost you incurred during the month to determine total manufacturing overhead costs. For example, assume your small business had $5,000 in total manufacturing overhead costs during the month.
Product Cost and Product Cost per Unit
Add together your total direct materials costs, your total direct labor costs and your total manufacturing overhead costs that you incurred during the period to determine your total product costs. Divide your result by the number of products you manufactured during the period to determine your product cost per unit. Using the numbers from the previous examples, add together $15,000, $3,200 and $5,000 to get $23,200 in total product costs. Assume you manufactured 200 bicycles during the same period. Divide $23,200 by $200 to get a product cost per unit of $116.
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