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Product costs are the costs a business incurs to produce goods.
These include direct materials, direct labor, and manufacturing overhead.
Consider Prim Tech, a laptop manufacturer.
It buys parts such as processors, screens, and keyboards and adds their cost under direct materials.
Next, the people on the assembly line put together all the components. Their wages are grouped under direct labor.
The company also incurs manufacturing overhead, including factory rent, equipment depreciation, and indirect labor such as supervisory staff wages.
Together, these make up the total cost of producing laptops.
Product costs are recorded as inventory on the financial statements while the laptops are unsold.
When the laptops are sold, their cost is transferred from inventory to the cost of goods sold.
In short, product costs stay with the product from the factory to the customer. They start as an asset on the balance sheet and become an expense on the income statement once the sale happens.