How to calculate the cost of production? Formula and example

When the question "Calculate the production cost of production" appears, the study of the methods used for these calculations becomes very important. Cost is the estimated cost of natural resources used in the production (work, services), raw materials, materials, fuel and energy resources, fixed assets, labor, marketing and advertising costs.

In accordance with the concept of cost, it includes all the total costs associated with the manufacture or purchase of a unit of production (work).

Cost structure

Products (services) obtained in the course of production or acquisition have their own value, consisting of the following cost elements:

• Material costs represent the cost of all materials spent on the manufacturing process.
• Cost of purchased goods for resale.
• The cost of energy resources and other natural resources used for heating, lighting and water use.
• The cost of raw materials, which is necessary in the production process.
• Labor cost. This category includes resources that have been spent on the formation of the salaries of the employees involved, as well as on contributions to the budget and extrabudgetary funds, taxes and insurance payments for these employees.
• Cost of fixed assets. These include expensive equipment, the use of which is necessary in the production or production. Depreciation accounting for this equipment is required.
• Administrative expenses include the content of managers and managers.
• Other expenses arising during the production cycle.

Cost Types

Cost can be of two types:

• Full or medium, which includes absolutely all expenses of the enterprise. In its framework, all expenses that are related to the acquisition of equipment, tools, materials, transportation of goods, etc. are taken into account. The indicator is taken as an average value.
• Marginal cost depends on the quantity of products and displays the cost of all additional units of production. Thanks to the obtained value, it is possible to calculate the effectiveness of further expansion of production.

Cost types

By the nature of the costs incurred, there are several types of cost of goods, products or services:

• Shop value consists of the amounts of expenses that are related to the production process of the company. They include the cost of raw materials, the wages of workers.
• Production cost consists of other costs for the maintenance of the enterprise. This is the cost of natural resources, the content of management personnel.
• Full cost is all the costs that are associated not only with the process of purchasing or manufacturing products, but also with its sale of products. In addition to the above, this includes advertising costs, hospitality and other expenses.

The most popular in accounting for economic activity is the total cost (full). Her analysis allows us to determine ways to reduce costs, thereby increasing the company's overall profit.

Cost calculation

To calculate the cost of production at the enterprise, it is necessary to summarize the costs that are required for production and output. This indicator does not take into account the cost of sales.

The formation of the cost of the enterprise occurs before the sale of products, as the price of the product depends on the value of this indicator.

The most popular option to calculate the cost of production is the calculation method. Thanks to this method, you can calculate how much money is spent on the production of 1 unit of output.

Analysis of the amount of costs and costing is a prerequisite for calculating the effectiveness of the company's products. The lower the level of the spent resource base for the production of one unit of goods (services), the more profitable the production process for the company becomes. Cost, therefore, directly affects the final profit. The increase in the cost of production costs worsens the financial condition of the enterprise. Sometimes the proceeds from the sale of goods may not even cover all expenses incurred.

One of the simplest options for increasing company profits is cost-cutting measures. An unacceptable situation is when a reduction in cost will adversely affect the product itself. In the end, it will be very difficult to sell products of insufficient quality in the future. As a result, the owner will suffer losses even at a low price.

The primary source of information on the spent resources may be primary accounting data in accounting. In the process of production of goods or the provision of services, the bulk consists of the costs of the basic, auxiliary production processes, as well as other general business expenses.

If we are talking about trading processes, then the cost of goods consists of the purchase price of this product and the costs of its sale.

When providing services, the prime cost is formed at the expense of the necessary costs for the process of rendering the service: rental payments, utilities, materials, labor costs.

Calculation Methods

There are two ways to calculate the cost of sales. This is a costing method and a tiered allocation method. The first method is most often used, because it allows you to more accurately and quickly determine the cost of production. Let's consider it in more detail.

Costing is the calculation of costs and expenses that are recorded per unit of output. At the same time, costs are grouped by elements.

Depending on the type of production activity and its costs, the calculation can be performed in several ways:

• The direct costing method arose and developed in a market economy. It calculates a limited cost. That is, the calculation uses the amount of direct costs. Indirect costs are written off to the sales account.
• Custom method. It can be used to calculate the cost of each unit of production at enterprises producing unique equipment and products. For complex and time-consuming orders, it is wise to calculate the cost of each product.
• Alternate method. This method is used by enterprises that carry out mass production, and the production process itself involves several stages. Cost is calculated for each stage of production.
• Process method. It is used by mining enterprises or companies with a simple process (for example, in the production of asphalt).

Calculation formula

The answer to the question of how to calculate the cost of production according to the formula is as follows:

• Total cost = Production cost of production + Costs of sale and sale.

This is a simplified version.

A detailed and expanded answer to the question of how to calculate the cost of production using the formula looks like this:

• C = P + OM + BM + T + E + C + Am + B + NC + Ab + C + CC + C

where P is the cost of the purchase of semi-finished products;

OM - basic materials;

VM - auxiliary materials;

T - transportation costs;

E - energy costs;

C - costs for the sale and sale of products;

Am - depreciation expenses;

In - remuneration of key employees;

NZ - non-production costs;

Over - employee benefit payments;

- factory costs;

SS - insurance payments;

- shop expenses.

Production cost

The work of the company is always focused on the production and production. At the same time, the company incurs costs by investing in production, raw materials, labor and energy.

Thus, the cost of production is the aggregate of all costs for the release of the product and does not include the costs associated with its implementation.

Actual cost

To calculate the actual cost of production, we take real data obtained on the basis of actual costs, then the price of the goods is formed. To make such a calculation is very inconvenient, since it is often necessary to know the cost of a product before it is sold. The profitability of the business depends on this.

Regulatory costs

The calculation of the standard cost is based on data obtained in accordance with existing standards. In this regard, it is easy to control the consumption of materials, which minimizes the occurrence of unnecessary costs.

Unit Cost

The calculation of unit costs for the production of one unit of production is carried out in three stages:

• it is necessary to determine the total cost of all manufactured products, then the total cost is divided by the number of manufactured products;
• administrative and selling expenses in the total amount are divided by the number of products sold for the reporting month;
• you need to add up all the indicators calculated above.

However, organizations that produce one type of product and have a certain amount of stock in the warehouse that are not yet sold to the buyer use a simple two-stage calculation method.

The question "How to calculate the cost per unit of production?" can be supplemented using a simple two-stage calculation method according to the following formula:

• C = (PZ / Kp) + (UK / Cr),

where C is the total cost of production, rub .;

PZ - total production costs for the reporting period, rub .;

UK - administrative and selling expenses, rub .;

Kp - the number of units produced during the reporting period, pcs .;

Cr - the number of units of products sold during the reporting period, pcs.

How to calculate the cost of production (and an example of calculation)

To understand how to perform the calculations, consider the example of calculating the cost below.

Before proceeding with the calculations, you must do the following:

• to summarize the total costs associated with the acquisition of raw materials needed for production;
• calculate how much money was spent on energy;
• determine all the costs associated with the payment of wages;
• determine deductions for depreciation deductions;
• calculate the costs associated with the sale of products;
• analyze and take into account other production costs.

Our task is to calculate the cost of 1000 units. products at a conditional plant. We have the following initial data, which are presented in the table below.

You can calculate the cost of production in the table below.

Ways to cut costs

The main tasks of business entities in market conditions in the course of their activities can be called actions aimed at making a profit, including cost reduction within reasonable limits.

Reducing the cost of raw materials can significantly degrade the quality of products, which leads to a deterioration in the financial condition of the company. To resolve this issue, it is possible to purchase cheaper substitutes for raw materials or purchase goods in large quantities at wholesale prices. It is also necessary to observe the modes of saving the use of inventory to eliminate damage and possible losses.

The costs of utilities are constant, a reasonable expenditure of energy, water, fuel can save cost items.

A thorough study of each cost element allows you to determine the need for certain costs, find ways to reduce them. The ultimate goal of these tasks is to obtain the maximum possible amount of profit and increase profitability.

Conclusion

Cost is one of the most important indicators of the quality of work of any enterprise. It does not have a permanent meaning. Cost has a tendency to change and dynamics. Therefore, it is very important to periodically calculate it. Due to this, it is possible to regulate the market cost of goods, thereby avoiding bankruptcy and unnecessary costs for the enterprise.