Product Costing: All You Need To Know In 4 Easy Points


Pricing a product is one of the major decisions you would make as the whole business runs on the product cost. The product cost is decided by various factors which include cash flow, profit margins, which cover the expenses. Deciding on the product cost is very easy due to which various new businesses get confused and trapped in this vicious circle. Launching and testing the customers can be a great start to set the price of your product, however, you still need to keep the cost of the product at the starting stage.

  1. What is a product costing?
  2. PC Formula
  3. How to calculate product costing?
  4. Techniques or how to calculate cost of a product

1. What is product costing?

The product costing definition is the cost incurred to create a product that is to be sold in the market. The cost includes materials, labour, and overheads of manufacturing. It is a part of the controlling module which is used to decide the cost of the product by deciding upon the value including various internal costs. It is a niche skill. Many people try to avoid it due to their complex structure. The actual cost is determined through purchase price, actual expenses, and production quantities. The actual costs are compared with the standard costs to make management decisions and determine the profit. 

The main component of your cost is that it needs to support your business. On the off chance that you value your items at misfortune or an impractical overall revenue, you will think that it’s difficult to develop and scale. There are other significant variables that your valuing needs to represent, similar to how you’re evaluated corresponding to your rivals, and what your estimating system implies for your business and your clients’ desires. However, before you can stress over anything like that, you have to ensure you’ve discovered an economical base cost.

2. Product Costing Formula

Setting up the product cost formula is very important to get the right price of the product to survive the market standards and incur the costs. The answer to how to do the costing of a product can be complicated. There are many steps involved in this stage. The product costing system includes: 

Initially, you have to include the variable expenses. Regardless of anything else, you need to see the sum of the costs drew in with getting each thing out the portal. Direct material expenses are likewise remembered for this as this is the expense caused to buy crude material for assembling the item.

On the off chance that you demand your things, you’ll have a reasonable answer concerning how much every unit costs you, which is your cost of product sold. In the event that you make your things, you’ll need to tunnel to some degree more significant and look at a store of your rough materials. What sum does that pack cost, and what number of things would you have the option to make from it?

That will give you a brutal measure of your cost of product sold per thing. Regardless, you shouldn’t neglect to recall the time you spend on your business is significant, too. To esteem your time, set an hourly rate you have to gain from your business, and thereafter segment that by the number of things you can make in that time. To set a sensible worth, attempt to combine the cost of your time as a variable thing cost.

Next, you have to add the overall revenue. At whatever point you have a total number for your variable costs per thing offered, it’s an ideal occasion to join advantage into your expense. For instance, you have to obtain a twenty per cent generally income on your things on top of your variable costs. Presently as you are picking this rate it is critical in two things. You have prohibited your fixed costs yet, so you will have costs to cover past your variable costs.

You need to consider the overall market and guarantee that your expense with this edge really falls inside the all-around “commendable” cost for your market. On the off chance that you’re 2x the expense of the whole of your adversaries, you may find bargains become testing depending upon your thing grouping. Presently, as you are prepared to ascertain the value take all the variable cost partition by one and less the ideal overall revenue. This is the route of how to compute the expense of an item.

The accompanying stage is to Remember that variable costs aren’t your solitary expenses. Fixed expenses are the costs that you’d pay regardless, and that stay similar whether you sell 10 things or 1000 things. They’re a critical bit of keeping up your business, and the goal is that they’re covered by your thing bargains as well. Exactly when you’re picking a for each unit esteem, it might be problematic to figure out how your fixed costs fit in.

A fundamental procedure to progress toward this is to take the data about factor costs you’ve as of late totalled, setting them up in this make back the hidden theory examiner accounting page. To adjust the bookkeeping page, you have to go to the document and copy a duplicate that is basically accessible to you.

These estimations can help to settle the choice which can bring ease in fixed expenses at a reasonable cost. This explains the product costing example. 

3. How to calculate Product Costing?

The best way to calculate the cost is already stated above. Here are three more categories basis which you can decide the product cost

A) Direct material

This needs to be considered as the raw materials which are involved in manufacturing the product has to be included in the process.

B) Labour

The labor costs are included as well such as wages, benefits, insurance, etc. which are paid to the employees who are directly involved in the product manufacturing process.

C) Overheads

These include the factory related costs which are indirectly involved in the costs while producing the product which includes machinery cost, etc. It includes indirect materials cost and indirect labor cost.

4. Techniques or How to calculate the cost of a product

For example, a company is producing 500 chairs. To produce 500 chairs, the following costs were incurred.

Rs. 6000 on wood

Rs. 1000 carpenter wages and Rs. 500 to the security guard for guarding the manufacturing facility.

Rs. 50 for a bag of nails.

Rs. 500 for rent and utilities.

Here, the cost of production will now be 6000 (wood) 1000 (labour) 50 (indirect material) 500 (indirect labour) 500 (other cost) = Rs. 8050.

Now, the cost to produce 500 chairs, the per-unit cost will be Rs. 16.01 (8050/500)

Coming to the period costs

The product cost and period cost both are included while deciding on the price of the product. The period costs are the non-manufacturing costs that are expensive while the accounting process.

These are product costing techniques. There is a various product costing methods in excel format which makes calculations quite easier. This is the main product costing method in manufacturing which is used by various companies. These are various product costing software which is involved in deciding the price of the product. 


Interested to learn all about Product Management from the best minds in the industry? Check out our Product Management Course. This 6-month-long program takes place online through live instructor-led sessions. It is the only program in India that offers the ‘Bring Your Own Product (BYOP)’ feature so that learners can build their product idea into a full-blown product, and go through an entire Product Development lifecycle.

Not only this, but this is the only program in India with a curriculum that conforms to the 5i Framework. Post completion, learners receive a joint certification from the Indian Institute of Management, Indore, and Jigsaw Academy. 

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