 Hello, in this lecture, we will define product costs. According to fundamental accounting principles, while the 22nd edition, the definition of product costs are costs that are capitalized as inventory because they produce benefits expected to have future value, include direct materials, direct labor, and overhead. Support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. When we're thinking about the profit product cost, we can think about a manufacturing company and we can think about the items of inventory. What is included in inventory? Clearly, they're going to be the direct materials. That's what most people think of when we think of inventory as if it's just a natural resource. But obviously there are other items involved, including the direct labor and the overhead, everything else that we're going to have to categorize somewhere. So we could break those out into direct costs and indirect costs. These being the pieces, the components of inventory, including direct materials. So if we're making something out of plastic, obviously the plastic, it's going to be some kind of direct material would could be a direct material that would be included in the ending product. Then we have the direct labor, that labor that's going to be directly included into the production process. That labor that we can tie to a particular job or a particular process, whichever system that we are using. These two items, the reason they are direct is because we can tie them out to a specific inventory or specific process or a specific job. That's what makes them direct. Indirect means that it's still going to be part of inventory. So it's still going to be thought of as a piece of the ending product of the inventory. But it could be something like the rent or depreciation on the factory. We could have a supervisor salary, small components like glue or something like that. We can't tie these things directly to a particular job process or unit of inventory. The rent is going to be for all the inventory that we make within the factory. The contractor may be supervising all inventory within the factory. Glue is so small that we probably don't want to track it to any particular item and therefore we can't, we don't want to try, it's not cost effective to track it. And we could have maintenance on the factory, again something that is not applicable to a specific unit because it's on the entire factory. But we do want to include it in inventory. The way we're going to do that is to put it into an account called overhead and then apply it out to the particular inventory unit or job or process.