Product costing refers to the process of assigning shared direct and indirect costs to individual products, customers, branches or other cost items. (USAID, 2007) Product costing is also referred to as assigning costs to inventory and production based on the expenses that go into producing or buying inventory. It is an important process for manufacturers that helps improves management information on products and helps managers and the board members to take key decisions about product design, delivery mechanisms, and especially pricing. (Lacoma, 2013)
There are several benefits of having a product costing done. These include Accuracy, Project Tracking, Decision-Making and Project Development. Accuracy: Accuracy defines how the expenses for the business is found through product costing. It also corrects inventory values through variable costing. Project Tracking: This basically means a keeping track of a project through by assigning costs for various stages and matching it to the success. Decision-Making: Product costing helps in decision making because these decisions often involve return on investment and how much profit a business can make from its sale. Project Development: Creating new products involves the use product costing and is used by a company to plan and design new line of products or to recreate an old product with new features.
Manufacturing costs is also known as the cost to make a product. Thus it plays a major role in product costing. It is classified into three types Direct Materials, Direct Labor and Manufacturing Overheads. So basically Product costs are manufacturing costs. In a balance sheet the product costs are presented as Raw materials inventory, Work in process inventory and Finished goods inventory. If we see the flow of these product costs it goes from the Direct Materials, Direct Labor and Manufacturing Overhead through Work in Process to Finished
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