Product costing methods for business success

Product costing is critical to business operations, allowing companies to set competitive prices and maximize profits. Understanding the various costing methods will enable you to make informed decisions on pricing strategies and stay ahead of the competition.

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Last updated: 31.03.2023 5 mins read

Have you ever opened your banking app and been struck with a wave of panic? Or found yourself staring at your phone screen in utter bewilderment, wondering where all your money went? These are all-too-common experiences that can be easily remedied with a well-implemented product costing system.

While personal finance can be daunting, the stakes are even higher when it comes to running a successful business. Without a solid understanding of where your expenses are going, you risk losing money and valuable resources.

That’s why product costing is a vital component of any thriving business. This article delves into the intricacies of product costing to help you gain a deeper understanding of its importance.

What is product costing?

Product costing is an essential aspect of business operations that enables companies to effectively manage their finances. Simply put, it refers to the process of calculating the expenses associated with creating or acquiring a product.

By having precise and up-to-date product costing information, companies can make well-informed decisions about pricing, production, and resource allocation. With this valuable insight, businesses can optimize their operations and drive profitability.

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The 4 types of product costing

Businesses of all shapes and sizes aim to produce high-quality products that meet customer needs while ensuring profitability. In this quest for success, product costing plays a vital role. It helps determine the cost of goods sold, which eventually determines the price of a product. While there are various types of product costing, we will delve into the four main categories that businesses typically use to categorize their expenses.

Job costing

Job costing is used to calculate the cost of producing a specific product or service. This method takes into account the labor, material, and overhead costs associated with the job. It’s commonly used in industries such as construction, where each project is unique and requires custom pricing.

Process costing

Process costing is used to calculate the cost of producing a large number of identical products. This method is typically used in manufacturing environments where products are made in large batches. The total cost of production is divided by the number of units produced to arrive at the cost per unit.

Activity-based costing

Activity-based costing, or ABC costing, allocates indirect costs to specific products or services based on the activities involved in producing them. This method is useful when many indirect costs are associated with a product, and it’s difficult to determine how to allocate those costs. By identifying the activities involved in producing a product, it becomes easier to determine how much of the indirect costs should be allocated to that product.

Standard costing

Standard costing uses predetermined standard costs for materials, labor, and overhead. The actual costs are then compared to the predetermined costs to identify variances and make adjustments. This method is useful when a company wants to identify areas of inefficiency and reduce costs.

How to find product cost?

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Wondering how to calculate product cost? Finding out the product cost of your business is as simple as applying a quick product cost formula. All you have to do is add up the costs associated with the item’s production and divide them by the total number of units.

The following formula can be used to calculate the product unit cost of your business:

Product unit cost = (Direct labor + direct materials + consumable production supplies + factory overhead) / number of units produced

Product cost examples

Now that you know the formula, let’s take a look at some practical examples of what a product cost analysis looks like:

  • A company manufactures 2,000 chairs, and the total cost of producing them is $20,000. This means that each chair has a product unit cost of $10 ($20,000/2000).
  • A toy manufacturer produces 2,500 toys, and the total cost for materials and labor is $50,000. Thus, the result is a product unit cost of $20 ($50,000/2,500).

It’s important to include all related costs of manufacturing the product when you calculate product cost. For the chair example, this would include the wood, nails, glue, and labor, among other costs. If these costs exceed the selling price of the chair, then your business is undoubtedly making a loss and needs to re-evaluate the product costing system immediately.

Activity-based costing vs. product costing

A more intricate way of calculating your costs is known as activity-based costing. It’s a step deeper into understanding your costs. Activity-based costing looks at the activities that go into making a product and assigns costs to those activities rather than the product itself.

For example, let’s say you manufacture computers as your main product. Your activity-based cost analysis might consider the following activities: design, assembly, testing, and shipping. Each of these activities has its own associated cost, which is then added together for an accurate total unit cost for each computer produced.

Nevertheless, every company should at least know their product cost as a bare minimum, as this knowledge alone can be used to make effective pricing decisions. When combined with activity-based costing, product costing can be a powerful tool for running an even more efficient business.

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Accounting for product cost

This wasn’t meant to be a pun, but product costs are also accounted for in accounting. They are essentially categorized as inventory on the balance sheet and can be tracked in the inventory account (which is often referred to as a current asset).

The total product costs you have incurred for any given period should be reported on the income statement only when sold. This will give you an accurate view of your cost structure, and it’s also essential information when calculating taxes owed or other financial statements.

How Katana helps with product costing

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Managing the financial aspect of your business can be daunting, but with Katana’s cloud manufacturing platform, you can say goodbye to the hassle and embrace seamless product cost accounting. The software provides an array of tools that simplify the cost-tracking process and allow you to focus on what really matters — your business.

One of the standout features of Katana is the automated production orders system. From the moment an order is placed, the system tracks all costs associated with each product. This ensures that you have access to real-time cost data, enabling you to make informed decisions about pricing and other financial matters quickly and with ease.

With the inventory management feature, you can monitor your stock levels at any time. At the same time, Katana provides accurate information on how much it will cost to produce or purchase more products if needed. This feature helps you to optimize your inventory levels and improve your cash flow.

Katana’s reporting tools offer insights into your company’s financial performance, giving you a clear picture of where your money is heading and where it should be heading in the future. With this information, you can make data-driven decisions about your product costing and confidently take your business to new heights. Try it out with a free 14-day trial today!

Product cost FAQs
What is product costing?

Product costing is the process of determining the total expenses involved in the creation of a product, including all direct and indirect costs.

How to find product cost?

To find product cost, you need to calculate all the expenses involved in producing a product, including direct costs such as materials, labor, and overhead costs.

What are product costing examples?

Product costing examples include the cost of raw materials, labor wages, packaging materials, shipping costs, and overhead expenses like rent, electricity, and depreciation.

What are the four types of costing?

The four types of costing include job costing, process costing, activity-based costing, and throughput costing.

How is product costing done?

Product costing is done by identifying and calculating all the costs involved in producing a product, such as direct material costs, direct labor costs, and overhead costs. These costs are then added up to determine the total cost of the product.

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Henry Kivimaa


Henry is an avid traveler with a passion for writing. Having lived most of his adult life abroad, he’s amassed a variety of experiences from many different fields. From ForEx trading to compliance to mobile engineering to demolition, he’s definitely not afraid to test out new things.

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