Production Costs Example

Production cost is understood as the cost generated during the manufacture of a product or service, this It is represented by three basic elements, which are also called elements of production:

a) Raw material
b) Labor
c) Production costs

a) The raw material is the basis with which a product is made and without it the objective of the company cannot be realized and is classified as the main cost of production.

It is by handling the raw material that it produces a completely different product from the starting material.

b) Labor is always necessary for the transformation and creation of the final product, which will be made with the raw material.

This is classified as the second main element in the cost of production.

In labor, the cost corresponding to the salaries, benefits and requirements that accompany the worker, along with the preparation and education that is established or considered necessary for the production.

In labor, there is a subdivision in which all those elements of a company are found, which perform essential tasks but that are not tangible or visible at first glance in the final product, such as executives, warehousing, transporters, quality supervisors etc.

There is also a cost called “indirect production cost”, which is an existing cost but is not quantified when moment of reviewing the final cost of the product, since it remains in an apparent margin to the manufacture of the product final.

As with the maintenance or repair of machinery, or updating and alternate movements for the improvement of the product, etc.

Prime cost

The prime cost is the general cost produced by the manufacture of the final product. This is obtained with the meeting of the cost of direct materials, direct salaries obtaining the prime or main cost.

Production cost example:

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

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
• Plate chocolate 200 kilos

Workforce

1. Bakers (two bakers) 8000 for each one plus 3000 in legal benefits = 11000.00
2. 4000 assistants (six assistants) 4000 each plus 2000 in legal benefits = 6000.00

Production costs

1. Ovens adjustments and maintenance 500.00
2. Gas regulations 200.00
3. Kneader 5000.00
4. Light 2500.00
5. Water 200.00
6. Benders 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 Fifty thousand two hundred pesos M / N per month supplying four outlets and the bakery.