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How to calculate the cost of production

The cost of production or sales is one of the most important indicators for the analysis of the efficiency of production activities of both the enterprise as a whole and its individual structural units. So, we will tell the readers of the world Councils, what is the cost and how it is possible to calculate.
Cost in the classical sense is the amount of costs incurred by the enterprise for the production (production) and sale (cost of sales) of its products. The amount of costs for the production and sale of goods is called the total cost. The cost price is calculated both for the entire output and for the production of a specific unit of goods.

The production cost includes the costs of the production phase. Such costs include:

Payment for raw materials and basic production materials.
Fuel and energy costs.
Transportation costs (internal movement of raw materials and semi-finished products).
Repair and maintenance of fixed assets.
Other costs.
Depreciation of fixed assets and intangible assets.
The cost of sales include the costs incurred by the company at the stage of sales. These costs include:

payment for product packaging;
advertising expenses;
transportation costs (delivery of goods to the buyer or to the distribution warehouse);
other costs.
The following statistical methods are used for cost analysis:

The method of grouping – is to group all costs by homogeneous elements, followed by grouping in the article calculation (tab. 1).
The use of cost groupings makes it possible to analyze the implementation of planned indicators at the middle and upper levels, because budgeting costs at the lowest level is impossible, especially in large enterprises.

The method of averages – is to calculate the weight of costs in the structure of production costs. This method allows you to determine the proportion of individual costs (items or calculation items) in the cost structure to determine the impact of items on the overall result (tab. 2).
Graphically, this structure can be represented as follows (Fig.1).

For rice.1 it is seen that the largest share in the structure of total costs are the costs of raw materials, respectively, variability in this article will have a greater impact on the variability of the overall result.
The graphical method makes it possible to visualize the analysis of the cost price, the dynamics of its changes and changes in the structure in a graphical form. In the following figure, we will demonstrate the use of several cost analysis methods.
Thanks to this diagram, you can clearly demonstrate the dynamics of changes in cost over the periods and the main reasons for its change. Graphical method of cost analysis is the most preferable for the preparation of information for the top management of the company, because it is the most digestible.

Methods of calculation of the cost
The two main methods of costing that are used in practice are:

full cost absorption method;
margin method (direct costing).
The method of full absorption of costs involves calculating the cost of each unit of production, taking into account all costs. This method is used if it is necessary to analyze the profitability of individual products.

The margin method is based on the division of costs into two parts:

Variable costs – the value of which depends on the volume of production. These costs include: the cost of basic raw materials, energy, transport. Variable costs are calculated per unit of each type of product.
Fixed costs – the value of which does not depend on the volume of production. The essence of these costs is that the enterprise will bear them, regardless of whether it will produce finished goods at all. These costs include: wages, the cost of repairs of fixed assets. These costs are not attributed to the cost of each unit of production, and accounted for the entire output. Justification of such method arises in case of need of decision-making on expediency of releases of this or that type of goods.
With different approaches to cost calculation, the financial result may be different.

Consider the situation:

The company produces 1000 tons of metal. Variable costs for the production of one ton – $ 60/ton, fixed costs – $ 30,000, sales of finished products – 950 tons. The price of sold products is $ 100/ton.
The difference between the two methods is the accounting for the cost of the balances. In the marginal method, the increase in balances reduces operating profit, and in the method of full absorption of costs – on the contrary, increases.

In international accounting, the concept of cost is replaced by the concept of EBITDA cost.

EBITDA cost consists of the sum of expenses on manufacture and realization of production without depreciation.

In this case, EBITDA – profit before tax, excluding depreciation, is taken as an indicator of the company’s performance.

EBITDA = Variable contribution – Fixed costs, where:

Variable contribution – margin profit, which is calculated as the difference between the NRP (sales price) and VC (variable costs) multiplied by the sales volume.
Fixed costs – fixed costs.
The cost of goods produced can be calculated on the basis of data on actual costs (actual cost), and on the basis of cost standards, calculated on the basis of approved cost standards for each element (standard cost). Standard cost is often used for the pricing process, for the conclusion of long-term contracts.

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