Product cost is an accounting term that refers to the total costs involved in making a product and getting it ready

for sale.

In manufacturing, product costs are expenditures that include the cost of raw materials, labor and manufacturing overhead.

Product Costs (Inventoriable)

- are those directly related to the production of a product or service intended for sale.
- a manufacturer, for example, would have product costs that include: direct labor, raw materials, manufacturing supplies, overhead that is directly tied to
the production facility such as electricity.
- for a retailer, the product costs would include the supplies purchased from a supplier and any other costs involved in bringing their goods to market.

31. The following information summarizes total production costs and number of units of product produced by Company B over the last 6 months:

Month Total Cost Units Produced

1 P24,000 30,000

2 30,000 42,000

3 28,000 40,000
Month Total Cost Units Produced

4 P27,000 34,000

5 25,000 32,000

6 23,000 31,000

Using the high-low method, the estimated cost function for this product is

a. Y = P9,000 + P0.500 x number of units produced.

b. Y = P7,500 + P0.585 x number of units produced.
c. Y = P3,285 + P0.636 x number of units produced.
d. Y = P 493 + P0.726 x number of units produced.

*Solution:

Highest activity cost – lowest activity cost

Highest activity units – lowest activity units

(P30,000 – P24,000) / (42,000 units – 30,000 units) = P6,000 / 12,000 units = P0.50 for the highest and lowest values of the cost driver

Y = total cost a = fixed cost

b = variable cost per unit x = activity level

Formula: Y = a + bx

P30,000 = a + P0.50(42,000 uniits)

a = P21,000 – P30,000

a = (P9,000)