Product Costs


Accountants prepare product costs to serve two purposes: Decision making by managers, and external reporting. Decision making product costs approximate the marginal costs economists discuss, i.e., the unit costs includes the amount that total company costs increase when an additional unit is produced.

Product costs for external reporting in contrast include a portion of company costs that do not vary with units produced. These product costs include material costs, labor costs, and overhead costs.

Product Costs for Decision Making

In many manufacturing companies labor costs remain constant over wide ranges of output, so managers can consider labor a fixed cost for many short-term output decisions. In addition, most overhead costs change only when managers decide to restructure the company, so these costs do not change as output fluctuates from day to day. The only costs that definitely does go up and down with production is the material cost.

Estimating Material Cost for Products

If a company has a reliable bill of materials , the accountant can simply take the total material cost from it as an estimate of product cost. The following example illustrates a bill of materials for a paint sprayer. As this example shows, the bill of materials lists all the materials and purchased components that make up the product, their quantities, and the unit cost for each one. The summation of the material cost for each piece gives the total material cost for the finished product. Accountants usually refer to this cost as the unit variable cost.

The accountant will estimate the unit production cost for the paint sprayer at $310 because this equals the materials cost for the product.


To estimate the increase in company cost from producing another 100 paint sprayers, the accountant merely multiplies the unit cost of $310 by the 100 units to arrive at a total cost increase of $31,000. If the accountant or manager expects any of the materials costs to change because of this order, he or she can just incorporate the new materials cost into the bill of materials to compute a new unit cost.

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