Example of Production Costs

Production cost is understood as the cost generated during the manufacturing of a product or service. It is calculated by adding all the expenses to manufacture a product or provide a service. They are used to determine the sale price and to evaluate the profitability of a business. In this article you will find the types of production costs, their examples, the formula and everything you need to know for your research.

The 3 types of production costs

There are 3 types of production costs and they are:

1. Fixed costs: They are those that do not change depending on the amount of production or the level of sales. For example: the rent of the premises, the salary of the employees with fixed salary and the insurance of the company. These expenses must be paid regardless of how many products are made or sold.

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2. Variable costs: These costs are directly related to the amount of products manufactured or services provided. As production increases, variable costs also increase and vice versa. For example: the materials to manufacture, direct labor or shipping costs.

3. Mixed costs: They are a combination of fixed and variable costs. An example of a mixed cost is electricity: one part of the electric bill is fixed (the basic rate), while another part varies according to energy consumption based on production.

10 examples of fixed costs:

1. Rental of the premises or building.
2. Salaries of employees with fixed salary.
3. Company insurance (property, civil liability, etc.).
4. Depreciation of machinery and equipment.
5. Loan amortization.
6. Administration and office expenses (stationery, internet, etc.).
7. License and permit fees.
8. Accounting and auditing services.
9. Fixed advertising and promotion (ads in print media, sponsorship fees, etc.).
10. Fixed infrastructure maintenance and repair costs.

10 examples of variable costs:

1. Materials and raw materials.
2. Direct labor (wages per hour or per unit produced).
3. Shipping and transportation costs.
4. Sales commissions.
5. Energy consumed in production (gas, electricity).
6. Storage and packaging costs.
7. Raw materials and production supplies.
8. Production expenses by subcontracting.
9. Returns and product guarantees.
10. Discounts and temporary promotions.

10 examples of mixed costs:

1. Electricity bill (basic rate and variable consumption).
2. Water bill (fixed rate and variable consumption).
3. Employee salaries with base salary and commissions.
4. Equipment and machinery maintenance expenses (fixed preventive maintenance and variable repairs).
5. Vehicle rental costs (fixed rate per contract and variable costs per use).
6. Travel and representation expenses (fixed per diem and variable expenses for business trips).
7. Contracts for technical support and software maintenance (fixed fees and variable costs for updates).
8. Telephony and communications expenses (basic rates and variable costs for calls and data consumption).
9. Rental of machinery and equipment (fixed rate per contract and variable costs per use).
10. Marketing and advertising expenses (fixed budget and variable expenses for specific campaigns).

How are production costs calculated?

To calculate production costs we will use a very simple formula that helps determine the total cost of manufacturing a product or providing a service. The basic formula for calculating production costs is:

Production Costs = Fixed Costs + Variable Costs + Mixed Costs

Example of production costs of a shoe company

cost type	Concept	Monthly value)	Grades
Fixed costs	Rental of the premises	$5,000	Local of 500 m², $10 per m²
Administrative Employee Salary	$8,000	4 full-time employees, $2,000 per employee
company insurance	$1,000	Liability and property coverage
machinery depreciation	$2,000	Initial investment of $120,000, useful life of 5 years
Licenses and permits	$500	Municipal and state licenses and permits
Variable costs	Materials (leather, fabric, soles, etc.)	$30,000	Based on 5,000 pairs of shoes at $6 per pair
direct labor	$20,000	20 employees in production, $1,000 per employee
Packing and packaging	$2,500	Based on 5,000 pairs of shoes at $0.50 per pair
shipping and transportation	$5,000	Depends on the number of orders and distance
mixed costs	Electricity bill	$1,500	$500 base rate, $1,000 variable usage
water bill	$800	Fixed rate of $200, variable consumption of $600
Machinery maintenance	$1,200	Fixed preventive maintenance and variable repairs
TOTAL PRODUCTION COSTS	77,500

Explained example of production costs of a bakery:

The bakery "my progress" needs to calculate the cost of production of bread, to get a monthly average cost.

To do this, start by calculating the cost of the different materials to prepare the bread:

Materials

• Bulk of flour 5000 kilos
• Lump of sugar 1500 kilos
• Salt 200 kilos
• gas 500 kilos
• Yeast 200 kilos
• you pass 120 kilos
• almonds 50 kilos
• Walnuts 80 kilos
• cornstarch 50 kilos
• butter 100 kilos
• Margarine 300 kilos
• Bitumen 120 kilos
• Jams 300 kilos
• Chocolate powder 150 kilos
• Chocolate plate 200 kilos

Labour

1. Bakers (two bakers) 8,000 for each one plus 3,000 in legal benefits = 11,000.00
2. Assistants 4,000 (six assistants) 4,000 for each one plus 2,000 in legal benefits = 6,000.00

Production costs

1. Furnaces adjustments and maintenance 500.00
2. Gas regulations 200.00
3. Mixer 5000.00
4. Light 2500.00
5. Water 200.00
6. Doublers 500.00
7. material supervision
8. Material transportation
9. Transportation of the finished product
10. Conservation (refrigerators)
11. Distribution of the finished product and sale.

Total production cost = $50,200.00 per month supplying four outlets and the bakery.