What is production cost? This type of cost plays an important role in maintaining production activities and the development of a business. Besides, this fee also contributes significantly to the overall economic development of the country. Let's Viindoo learn more about the concept, classification and meaning of this cost in the article below.
>>>> Outstanding Solution: Production management software
What is the production cost?
Production costs are collections of costs related to the production of finished products. Those costs include: Labor costs, raw material costs, and General production costs.
A quality product at a reasonable price is the result of general production management and management production expense in particular. Manage production expense effectively helps managers grasp production progress and production smoothing. From there, they can find methods to optimize production quality and costs. Therefore, businesses need to clearly understand operating production costs and control them strictly.
Production costs are an important type of cost in an enterprise's production activities
In addition, when allocating finance, businesses also need to clearly understand and distinguish between what is production costs and what is the production cost. Production costs are the costs directly incurred for the production of products in the factory (Including direct materials, direct labor, General production costs). Meanwhile, production costs include both production costs and indirect costs that contribute to the production process (Such as: Company accountant's salary or office supplies, management costs). …)
The difference between production cost and production cost
>>>> Learn More: Software to calculate product costs
>>>> Learn More: How to calculate unit product cost
Classification of
production costs
According to economic nature
Classifying production costs based on economic nature helps businesses understand the proportion and structure of each type of cost that needs to be spent in a certain period of time. Specifically includes:
- The cost of materials directly: Directly related to production and specifically determined for each product. These can be mentioned as main materials, auxiliary materials, and packaging.
- Direct labor costs: Directly related to production and specifically determined for each product. These include salary, allowances, and insurance.
- General production costs: Related to production but cannot be specifically determined for each product. For example, depreciation of fixed assets, maintenance, repair, indirect materials, indirect labor, and purchased services
Classifying costs according to economic nature helps businesses understand the proportion of each cost
According to uses and purposes
If we classify production costs according to use and purpose, we will have:
- Cost of raw materials: Including costs of main raw materials, auxiliary materials, packaging,...
- Labor costs: Including salary, allowances, insurance,...
- General production costs: Includes costs of depreciation of fixed assets, maintenance, repair, indirect materials, indirect labor, purchased services,...
- External service costs: Including transportation, insurance, agent commission, brokerage,...
- Cost of production tools: Including purchasing, maintaining, repairing production tools,...
- Other costs: Includes costs that do not fall into the above categories, such as research and development, production management, etc.
This classification helps with tasks such as managing production costs according to norms and calculations product price of business becomes easier to implement. Besides, businesses also know the status of product plan implementation. This is also the basis for work production capacity planning and cost planning in the next production period.
This cost classification helps businesses easily manage costs and calculate product prices
According to the relationship with the workload and products in the period
When classifying production costs according to the relationship with the volume of work and products in a period, it can help administrators find the break-even point. This is also the basis for businesses to make business policies and decisions such as changing product price to increase business efficiency. Specifically includes:
- Variable costs: Varies with the amount of product and work completed, such as direct materials and direct labor.
- Fixed costs: Does not change with the volume of products and work completed within a certain range, such as depreciation costs of fixed assets and property insurance.
Variable costs and fixed costs
According to the production and manufacturing process
Production cost classified according to the relationship with the production technology process into the following types:
- Cost of raw material: Arising from the use of raw materials in the production process.
- Labor costs: Arising from the use of labor in the production process.
- General production costs: Arising during the production process but cannot be specifically determined for each type of raw material cost and labor cost.
Dividing these two costs into two helps businesses determine the correct direction as well as come up with measures to maximize cost savings for each type. The methods given will determine the profits of the business.
Classifying costs according to production and manufacturing processes includes two types: basic and general costs
According to the method of gathering costs into cost objects
Production cost classified according to this form will include the following types:
- Cost of each product, good, or service
- Cost of each department and workshop
- Cost of raw materials
- Labor costs
This classification helps businesses have a reasonable cost allocation policy for objects through determining the group accounting method.
Direct and indirect costs
>>>> Explore More: How to reduce production costs
Formula for calculating production costs
Formula for calculating production costs may vary depending on the type of product, service, industry and how the business organizes its data. However, here is a basic formula:
Production costs = Raw material costs + Production labor costs + Machinery and equipment costs + Production management costs + Other costs
In there:
- Cost of raw materials: Includes costs of purchasing and processing raw materials.
Formula: Cost of raw materials = Quantity of raw materials needed x Value of raw materials per unit
- Production labor costs: Includes salaries and benefits for production employees.
Formula: Production labor cost = Number of required labor hours x Average salary of production labor
- Machinery and equipment costs: Includes costs of using and maintaining machinery and equipment.
Formula: Cost of machinery and equipment = Value of machinery and equipment / Average lifespan of machinery and equipment
- Production management costs: Includes salaries and benefits of management staff, along with production facility operating costs.
Formula: Production management costs = Salary and benefits of production management staff + Production facility operating costs
- Other costs: Includes costs that do not belong to the above categories such as transportation, insurance, space rental and other support costs.
The formula for calculating production costs includes many components
Example of production costs in a business
To help you easily visualize production costs in a business, the following are specific examples of production costs: production expense can arise in wooden furniture factories:
- Raw material costs: Cost of purchasing wood, glue, paint and other materials needed to produce wooden products such as tables, chairs, cabinets.
- Labor costs: Includes salary costs, social insurance, allowances for carpenters, painters and workers involved in the production process.
- Machinery and equipment costs: Costs of using and maintaining machines such as saws, sanders, coating machines and other mechanical tools.
- Production management costs: Includes salaries of factory management staff, factory operating costs and other allowances for management staff.
- Other costs: Includes costs of transporting raw materials and products, marketing costs to promote products, factory maintenance costs and research and development costs to improve products and production processes.
Example of production costs at an enterprise
Optimize production costs with Viindoo Manufacturing software
Viindoo Manufacturing is production management software specifically designed for manufacturing businesses. With comprehensive and extensive features, this software helps businesses optimize production processes, improve performance and labor productivity.
Manage production plans
Viindoo Manufacturing helps businesses create detailed production plans, including production scheduling, order management and progress tracking. From there, businesses can forecast and manage business production costs more precisely.
Viindoo Manufacturing is production management software specifically designed for manufacturing businesses
Management of raw materials and warehouses
The software provides warehouse management features, tracking inventory of raw materials, spare parts, and finished products. Businesses can strictly control inventory, avoid shortages or surpluses, thereby reducing storage costs.
Monitor and report production status
The software provides detailed reports on production status, such as output, machine performance, production expense,... From there, businesses can analyze, evaluate and make optimal decisions about production expenses.
Managing production costs is simpler with software Viindoo Manufacturing
FAQs
What is the difference between production cost and manufacturing cost?
Manufacturing cost refers specifically to the expenses incurred during the production process, such as raw materials, labor, and overhead costs. Production cost, on the other hand, encompasses the broader scope of expenses throughout the entire production and supply chain, including manufacturing costs as well as marketing, distribution, administrative overhead, and taxes.
What is the cost of production in economics?
In economics, the cost of production refers to the expenses incurred by a firm to produce goods or services. It includes costs associated with inputs such as labor, raw materials, equipment, and overhead expenses. The concept of cost of production is important for analyzing profitability, pricing decisions, and understanding the efficiency of production processes in an economy.
How do you calculate production cost?
The total product cost formula is Total Product Cost = Cost of Raw Materials + Cost of Direct Labor + Cost of Overhead.
The above article by Viindoo has provided businesses with the most comprehensive view of what is production costs. Understanding the costs during the production process of finished products is a way for administrators to control costs and maximize profits. Don't forget to contact us via hotline 02257309838 or Schedule a consultation for more detailed answers on how to optimize production costs with software coming. We are always ready to support you 24/7 free of charge.
>>>> Useful Information:
