Overview of Product§
In the realm of accounting, the term “product” encompasses any item, sub-assembly, part, or cost unit that is manufactured or sold by an organization. Products can range from physical goods to services designed to meet specific customer needs. They are central to a company’s operations since they are the primary drivers of revenue.
Detailed Definition§
A product includes any of the following:
- Item: A complete good that an end-customer purchases.
- Sub-assembly: Intermediate goods that form part of a more extensive system.
- Part: Smaller components which are assembled together to complete a product.
- Cost Unit: The computational unit that measures various economic quantities, including costs related to producing a product.
Examples§
- Electronics Company: A smartphone (item) that integrates several sub-assemblies (e.g., motherboard, display).
- Automotive Industry: A car (item) built from various parts like tires, engines, or transmission units.
- Service Industry: A haircut provided by a salon (product/service).
Frequently Asked Questions§
What differentiates a product from a service?§
A product is a tangible item that one can physically touch and see, whereas a service is an intangible act or use provided by one party to another. Services may or may not result in the ownership of anything.
How are products categorized in accounting?§
Products in accounting are categorized as inventory till they are sold. These can further be classified into raw materials, work-in-progress, and finished goods.
What is the significance of “product costing” in accounting?§
Product costing is vital as it helps in setting the sale price, measuring profitability, maintaining control over production, and managing budgets efficiently.
How do indirect and direct costs affect product pricing?§
Direct costs can be directly traced to a product (e.g., raw materials), whereas indirect costs (e.g., utility bills, salaries) are overhead costs distributed across multiple products. Both affect the final pricing through comprehensive costing mechanisms.
Can services be considered products in accounting?§
Yes, in the accounting context, services rendered can be considered products since they generate revenue and involve costs.
Related Terms§
- Inventory: Goods and materials a business holds for the ultimate goal of resale.
- Cost of Goods Sold (COGS): Direct costs attributed to the production of goods sold in a company.
- Bill of Materials (BOM): A comprehensive list of raw materials, components, and assemblies required to construct or manufacture a product.
- Margin: The difference between the cost to make a product and its selling price.
- Direct Costs: Expenses that can be directly traced to a particular product.
Online References§
Suggested Books for Further Studies§
- “Managerial Accounting” by Ray H. Garrison & Eric W. Noreen
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, & Madhav V. Rajan
- “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, & Donald E. Kieso
Accounting Basics: “Product” Fundamentals Quiz§
Thank you for exploring the comprehensive details of what constitutes a product in accounting and the fundamental quiz to deepen your understanding. Keep advancing your financial knowledge!
