What is Product Cost?
Product cost is the total cost incurred to manufacture a finished product, including direct materials, direct labour, and a fair share of manufacturing overheads. Under IAS 2, these costs are capitalised into inventory and only expensed when the product is sold (as cost of goods sold).
How It Works
- Track direct materials issued to production from the inventory ledger.
- Add direct labour hours worked on the product.
- Allocate a share of fixed and variable manufacturing overheads using a predetermined rate.
- Capitalise the total in inventory until sale, then transfer to cost of goods sold.
Saudi Context
Saudi manufacturing companies follow IAS 2 as adopted by SOCPA. Accurate product costing is critical for transfer pricing files reviewed by ZATCA and for valuing inventory at the lower of cost and net realisable value in IFRS financial statements.
Example
A Riyadh food factory spends SAR 5 on materials, SAR 2 on labour, and SAR 3 on overheads per unit, so product cost is SAR 10. When 1,000 units are sold, SAR 10,000 moves from inventory to cost of goods sold.