Production costs – understanding, example, and how to calculate it
When you run a business, you must know how much the costs are incurred. Therefore, you need to calculate production costs or production expenses. Because, when you calculate how much it costs on a product, you can find out the profit and loss of a product.
In calculating these costs, it is important to know which things need big and small costs. So, after knowing the cost of production, business people can analyze and evaluate. From these evaluations, the production process is easier to control.
Production costs are an important part of business financial reporting. If you or your team do it in detail and detail, the financial statements become interesting and easy to understand.
For you to easily understand the cost of production, this article will help you. Starting from understanding, example, and how to calculate it.
What is the cost of production?
Every business that makes the product or provides services to have the same purpose. That is, both seeking profits. These activities require expenses and are named by production expenses.
In general, production expenditure includes matters relating to the production process. These costs include raw materials, labor, or overhead companies. These three elements are very influential on production activities in business.
Direct raw material
All ingredients that at first are physically then become finished goods. So, the goods (products) have a selling value.
Some hands work behind production activities. After raw materials are met, the presence of labor is needed. Workers also sort out and choose raw materials to continue in the production process.
The existence of manufacturing costs within the company. In financial statements, Overhead has usually included all manufacturing costs.
The three elements are one unit and inseparable. If the overhead costs increase, the financial report automatically looks high. For example maintenance costs, factory insurance, water and electricity costs, and so on.
So, the number of expenses affects the cost of production. These costs are part of the production process of goods or services.
Example of production costs
When you carry out the production process, it takes recording the cost of production. So, the note is called a financial report. These are examples of production costs.
1. Fixed costs
First, fixed costs are a fixed amount and do not depend on production for a certain period. Like, building rent, tax, up to administrative fees.
2. Variable costs
Second, this expenditure can change according to the production process. That is, if the production is large, it can be ascertained that variable costs are also large. Like, raw materials and employee honorariums.
3. Total cost
This is the total cost. The sum of fixed costs and variable costs. That total costs are the overall production costs.
4. Average cost
The average cost is the cost calculated per unit. So, the total cost is divided by all the amount of business production.
5. Marginal costs
For marginal costs is an additional cost that appears when the product has become. This fee will appear when businesses want to expand production.
After knowing examples of production costs, you need to know how to calculate production costs or expenditure.
How to calculate production costs
Here will be given an example of the cost of production from the book.
1. Print cost for 300 copies: 7,000,000
2. Editor fee: 2,000,000
3. Cover designer costs: 1,000,000
So, the total printing cost is 10,000,000. Then divided by 300 copies then per copy, for production costs of 30,000. The existence of a calculation process in this production costs needs to be made with detail and detail.
That is an understanding, example, and how to calculate the production costs you need to know. When you have understood the importance of production costs, you are ready to run a business. For your business to grow and increase the number of customers you don’t forget to advertise through the Froggy Ads service, you can start by advertising your product, so that later you can improve visitors in your online business portal. FROGGY ADS is an online advertising service that can help you control all your product campaigns. Helps you target the targeting target you want and give you many choices to market your product.