Friday 18 January 2019

How to calculate cost of production?

As a business owner or as a production manager, find out how production costs is a very important thing in creating and maintain continuity of production and its business so that it can benefit the company. By knowing the costs at every step in its production, management can optimize production processes, schedules delivery and other public activities in an attempt to increase production efficiency so as to better than ever.

By knowing and analyzing production costs, management can set the prices of goods and services appropriately to achieve the appropriate margin. For example, the management of the company will track the price of Bread flour, eggs, sugar, butter and other commodities use in the production of bread. If there is an increase in the price of these goods, the production of Bread also has to raise the price to maintain the same level of profit.

So what is the cost of production and whatever else is classify as production costs. The following discussion in a nutshell.

Understanding production costs according to experts

For more details about production cost or Production Cost, the following are some of the sense of the cost of production, according to the experts.

  • A production costs are the costs associate with the calculation of the load Staples load staple production or sales. The cost of production or sales made up the cost of raw materials and auxiliary, labor costs and factory overhead costs.

  • The production costs are costs that must be incurred by employers in order to generate output or in other words the values of all the factors of production use to produce (produce the output).

  • A cost of production is the costs associate with the production of an item, i.e. the sum of direct materials, direct wages and factory overhead costs.

  • The production costs i.e. the costs directly related to the production of a product and will be reunited and income (revenue) in a period where the product is sold.

  • A cost of production is the costs occur for processing raw materials into a finish product ready for sale.

From some understanding and definition of the above, it can be conclude that the cost of production is the resources use to produce a product or service.

Types of production cost

Production cost or Production Cost can be defined as the total costs that must be incurred to the resources used to produce the goods or services for sale to customers. This production costs generally consists of 3 types or categories, namely direct material costs (Direct Material Cost), direct labor costs (Direct Labor Cost) and the overhead costs of the factory (Factory Overhead Cost).

Direct material costs (Direct Materials Cost)

The Direct material cost Direct Material Cost is the cost of purchasing the raw materials that go directly into the production of a product. These direct materials consumed as part of the production process. An example of raw materials such as Bread are flour, eggs and sugar. Raw material for children's toys are plastic and rubber.

Direct labor costs (Direct Labor Cost)

The Direct labor cost Direct Labor Cost is the full cost of all labor is directly involved in the production of goods or services. The labor in question here are those who work directly in the production line. Direct labor cost is usually in the form of wages, salaries, benefits and insurance that is paid to employees who are directly involved in the production process of the goods.

Overhead costs of the factory (Factory Overhead Cost)

Factory Overhead costs or Factory Overhead Cost is the cost require. To maintain the function of production, but not directly consumed on the unit individual. Factory Overhead costs include:

  • Indirect Materials. Use in the production process but cannot be traced directly to the product in question. Examples such as glue, oil, cleaners and other stuff. These materials are classified as indirect materials because it will not be possible (or ineffective). To determine the cost of materials that definitely goes into the production of a product.

  • Indirect Labor. That labor is not directly involved in the production of the product. Examples include engine maintenance technician supervisor, and security officers. Wages and fringe benefits of the workforce are classify as indirect labor costs.

  • Other costs. Such as rent expenses of the factory, machine rental and insurance is usually classify as other costs take into account the cost of production.

Example of Calculation of production Cost

A company that manufactures mobile phones are taking account of the cost of production. It can per unit total production of mobile phones a month. The cost of Direct Materials and direct labor cost issue is each amounting to $ 20 billion and $. 200 million. While the Factory Overhead costs are $ 150 million. The number of units that have been produced are as much as 10,000 units. What is production cost per Unit.


The cost of Direct Materials =  $  20 billion,-
Direct labor cost =  $. 200 million,-
Factory Overhead =  $  150 million,-
the number of units produced = 10,000 units

The solution:

The production cost per Unit = (cost of Direct Materials + Direct labor cost + Factory Overhead costs)/number of units produced

per Unit cost of production = (20 billion + 200 million + 150 million)/10,000
production cost per Unit = 20.35 billion/10,000
production cost per Unit = 2,350,000

So the cost of production in the month concerned is $. 20.35 billion, -and when calculated per unit then became the production cost per Unit is $. 2,350,000. If the company sells the Phones at a price of $ 2.8 million per unit. Then the margin of profit was $ 450,000, -or about 19.15%.

How to Calculate Product cost in Excel?

The total cost of production affect by fixed costs and variable costs. So if you will specify how the cost of production of an item then it should pay attention. To how much it costs and how variable costs. This time I will be a variety of how to determine or calculate how much total cost of production by using excel formulas.


Total production cost = fixed costs + variable costs

Before we find out how the total cost of production of the first we have to know what is a fixed cost? Because fixed costs affect the total cost of production. Here you should read the sense of fixed costs

Understanding fixed cost and variable cost

The cost is economical expenditure required for the calculation of the production process. This fee is based on the prevailing market price and at the moment this process is already happening or has not occurred. According to economics, the cost is divided into two, namely the cost of explicit and implicit costs. Explicit costs are costs that looks physically like money. While the implicit costs are costs that are not directly visible to IE for example depreciation of capital goods.

Production cost calculation excel template

Production cost calculation excel template

No comments:

Post a Comment