Product costs are expenses incurred during the creation of a product intended for sale to customers. The costs can be broken down into three components: direct material (DM), direct labor (DL), and manufacturing overhead (MOH).
- Direct material: cost of raw materials required to produce the products.
- Direct labor: compensations for employees who are involved in the manufacturing and production process of goods, including salaries, benefits, and insurance expenses.
- Manufacturing overhead: indirect costs spent during the production process, for example indirect materials, indirect labor (supervisors, security guards), and other costs (utilities, lease).
Difference Between Product Costs and Period CostsKeep in mind that product costs are different from period costs. The former are costs incurred to manufacture and producing product. These include raw material, labor wages, production overhead, factory rent, etc. On the other hand, the latter are costs not directly incurred in the manufacturing process. Examples include marketing costs, audit fees, and office rent. Production costs are recorded in the inventory account and are shown on the balance sheet. They are not recorded as cost of goods sold on the income statement until the product is actually sold.
How to Use This TemplateThis simple Excel template contains input cells in blue font and output cells in black front. To calculate the production costs, simply enter all your data in the blue cells including the direct material cost, direct labor, and manufacturing overhead costs. The total costs will then be automatically calculated for you. You may also modify this template by adding or removing any line items to compute the total costs for manufacturing products.
More Useful ResourcesRead CFI's guide to learn more about the definition and examples of calculating the costs. You may also explore the other accounting templates available on CFI Marketplace to find the next best accounting tools.