In accounting, product costs are costs that are directly associated with the production of goods or services. These costs are capitalized as inventory on the balance sheet and are only recognized as expenses (cost of goods sold) when the product is sold. Understanding which costs are considered product costs is essential for accurate financial reporting. Let’s explore which of the following items is not a product cost.

Common Types of Product Costs

1. Direct Materials

• Yes: Direct materials are a product cost. These are raw materials that are directly used in the production of a product. For example, wood used in furniture making or steel used in car manufacturing.

2. Direct Labor

• Yes: Direct labor refers to the wages and benefits paid to workers who are directly involved in producing a product. This cost is part of the product cost because it is tied to the actual creation of the goods.

3. Manufacturing Overhead

• Yes: Manufacturing overhead includes all the indirect costs associated with production, such as factory rent, utilities, and the salaries of supervisors and maintenance workers. These costs are necessary to produce goods but are not directly traceable to a specific product.

4. Selling and Administrative Expenses

• No: Selling and administrative expenses are not considered product costs. These expenses are classified as period costs because they are not tied directly to the production process. Selling expenses include things like marketing, advertising, and sales commissions, while administrative expenses include general office expenses like salaries of office staff and utilities.

Conclusion

The item that is not a product cost is selling and administrative expenses. These costs are incurred to support the business operations but are not directly involved in the production of goods or services.