Formulas and Methods of Calculating Production Costs

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Formulas and Methods of Calculating Production Costs

How to calculate production costs by adding up raw material costs (initial raw materials + additional raw materials), adding up labor and overhead costs. Then, subtract the remaining inventory at the end of the period. To make it more transparent, let’s explain the formula for calculating production costs and how to calculate production costs in this article.

Easy Formulas and Ways to Calculate Production Costs

Production costs are all costs incurred by the company to process raw materials into finished goods ready for sale. Calculating production costs precisely aims to determine the selling price and prevent the company from experiencing losses. To facilitate the process of calculating production costs, you need to calculate all components of raw material costs first. Here’s how:

1. The formula for Calculating Raw Materials

To calculate the cost of raw materials, you need to have a record of the beginning raw materials inventory. Then add the purchase of new raw materials. At the end of the production period, count the remaining raw materials. The formula:

Production Cost = Beginning inventory of raw materials + purchase of new raw materials – raw materials remaining at the end of the period

Example:
Initial inventory of raw materials: IDR 5,000,000
Purchase of new raw materials: IDR 10,000,000
Remaining raw materials: IDR 2,000,000

Then, the total cost of raw materials
= (IDR 5,000,000 + IDR 10,000,000) – IDR 2,000,000
= IDR 13,000,000

Formulas and Methods of Calculating Labor Costs

2. Labor Cost Calculation Formula

Labor costs are all costs for Labor in the form of daily labor wages, the basic salary for permanent employees, and benefits, which are directly related to the production process. In addition, it also takes into account indirect labor costs.

Labor cost formula:

Daily Labor = total hours worked x hourly wages
Permanent Labor = Basic salary + benefits
Indirect labor (security guards, cleaners, etc.) = Basic salary + allowances

Then, add them to find the total labor cost = daily labor cost + fixed labor cost + indirect labor cost

3. Overhead Cost Formula

Costs for purchasing stationery for factories, electricity costs, rental costs, security and cleaning costs, and even the use of coolers, gas, and so on need to be included in overhead costs.

Formula:

Overhead Costs = Electricity Costs + ATK Costs + Gas Costs + Cooling Machine Rental Fees + Factory Rental Fees + Security and Cleaning Fees

4. Production Cost Formula

After calculating all the costs included in the components of production costs above, then you can calculate production costs.

The formula:

Production Cost = Raw Cost + Labor Cost + Factory Overhead

Example:
Raw material costs = IDR 13,000,000
Labor costs = IDR 15,000,000
Overhead costs = IDR 2,000,000
Then, Total Production Cost = IDR 30,000,000

The formula for calculating the cost of production per unit

5. The formula for calculating the cost of production per unit

After the total production costs are known, you can also calculate the cost of production per unit. The goal, so that you know for one finished product, is how much the cost of production is. Having a benchmark production price per unit will help you determine the right selling price for each unit of product you want.

The formula for calculating the cost of production per unit:

Cost of Production = Total cost of production : product quantity

If, in one production run based on the calculation above, the company can produce 1000 units of finished goods, then the calculation is as follows:

Total Production Cost = IDR 30,000,000
Number of production units = 10000

Cost of Production per unit
= IDR 30,000,000, – : 1000
= IDR 30,000

Doing careful calculations regarding production costs will help you determine the right selling price, prevent losses, and determine the profit margin you want. To simplify the recording of all fees incurred during the production process, including during the process of running a business, you can use a free cashier application. Find out more about the iReap Free Cashier Application; you can immediately download the free cashier application.

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