Product cost
Product cost is any manufacturing cost — direct materials, direct labour, or overhead — carried as inventory until the unit is sold, then transferred to cost of goods sold.
Also known asinventoriable cost
See it move
A three-step flow tracks how product costs attach to units and move through the financial statements. The first box states production cost per unit — direct materials €40, direct labour €15, and manufacturing overhead €10, totalling €65 — and an arrow labelled 'attaches to unit' leads to the second box, which shows 100 unsold units carried as inventory of €6,500 on the balance sheet. A second arrow labelled 'released on sale' leads to the third box, where 300 sold units generate cost of goods sold of €19,500 on the income statement.
The formula
Variables
- Direct materials cost (€)
- Direct labour cost (€)
- Manufacturing overhead allocated to the unit (€)
Check yourself
A bicycle manufacturer incurs the following unit costs: steel tubing (direct material) €55, frame assembly wages (direct labour) €30, factory overhead allocated €20, delivery to the retailer €8, and warranty administration €5. Which costs are product costs?
If you trained under a national GAAP
DE · HGBWhere national-GAAP intuition diverges from the international standard
HGB (German)
HGB specifies a statutory minimum inventory cost covering direct materials, direct labour, and variable production overheads; fixed manufacturing overheads are legally optional and many entities — particularly those applying the minimum — exclude them from inventory entirely. As a result, product cost under HGB can be materially lower than under IFRS, and fixed overhead is recognised as a period expense earlier.
IFRS
IAS 2 mandates that a systematically allocated portion of fixed production overheads, based on normal production capacity rather than actual output, must be included in the cost of inventory. This requirement is not optional; overhead excluded because of abnormally low output is recognised as a period cost in the current period rather than deferred. The result is generally higher inventory values under IFRS than under a strict HGB minimum approach.