CPIM Practice Exam

In terms of production, what does the term product cost generally refer to?

1. Ongoing operational expenses

2. A sum of all overhead costs for multiple products

3. The sum of direct material, labor, and overhead for a product

4. The fixed costs associated with production

The correct answer is: The sum of direct material, labor, and overhead for a product

The term "product cost" typically refers to the total expenses incurred to manufacture a product, specifically encompassing three main components: direct materials, direct labor, and manufacturing overhead. Direct materials are the raw materials that are directly traceable to the finished product. Direct labor includes the wages and associated labor costs for workers directly involved in the production of the product. Manufacturing overhead includes all other costs that aren't directly traceable to a specific product but are necessary for production, such as utilities for the production facility, depreciation of equipment, and indirect labor costs. Understanding this definition helps clarify that product cost is an essential figure in determining the overall costs of producing a product and is critical for pricing, budgeting, and financial reporting. This understanding allows professionals in production and inventory management to assess profitability and make informed operational decisions.