Question

Discuss the components of product costs and how they are used in managerial accounting. Talk about what management decisions are made using product costs. What level of importance do product costs play in the business process? Please respond in at least 200 words.

Answer 1

A) Product costs: Product costs are all the costs that are necessary to create the product.

B) Three components of product costs are direct materials, direct labor & manufacturing overheads. How these components are used in managerial accounts is explained below:

Direct Materials: Direct material refers to all the raw materials that is used to manufacture the product.

Direct Labor: All workers employed on the production of the product constitute direct labor.

Manufacturing Overheads: These costs also termed as factory overheads are indirect manufacturing related costs, hence include salaries of manufacturing managers, depreciation on machines used in production process, etc.

C) Importance of product costs in the business process:

In business, product costs is the most crucial factor as it will determine the direct costs that will have to be incurred for running the business. The managers get idea on how much percentage of profits can be accomplished by the business keeping in view the market price of the product. Accordingly, they will try to minimize their other costs to the extent possible & will determine the selling price of the product. Further product costs decide the value of inventory in hand at the end of period after sales., thus contribute to determine the amount of closing inventory. In case of fluctuation in market price of the product, sales decisions will be made by the mangers on the basis of product costs. Overall, studying components of product costs & determining product costs contribute for important decisions such as accuracy in profit percentage calculation, in determination of costs that will have to be incurred, in investment decision such as planning of further processing of the product or for entering forward or backward into the manufacturing chain. Hence for businesses, it becomes crucial to always consider its product costs for effective decision-making.