What is calculating cost

Based on the given information, Calculate the total cost of production for the company when the quantity of monthly production is:. In this example, it can be seen that the total cost of production is directly proportional to the level of production.

Based on the given information, Calculate the total cost of production when the quantity of production is:. Step 1: Firstly, determine the cost of production which is fixed in nature i. Some examples of the fixed cost of production are selling expense, rent expense, depreciation cost, etc. Step 2: Next, determine the average variable cost per unit for those expenses which are dependent on the level of production.

Some examples of the variable cost of production are labour cost, raw material cost, etc. Step 3: Next, determine the level of production or the number of units produced. Step 4: Finally, the formula for total cost can be derived by adding the product of average variable cost per unit step 2 and quantity of units produced step 3 with the total fixed cost of production step 1 as shown below.

The concept of the total cost of production is very important to understand from the perspective of production managers because it helps in the assessment of overall profit margin at a different level of production. Principally, the total fixed cost is not expected to change over a shorter period of period and so the total cost of production is primarily driven by the change in average variable cost per unit.

Note that neither of these calculations includes any costs for direct labor or other indirect costs. In addition to the cost of raw materials, any direct labor used in the manufacture of the products must be included in the cost of sales. However, indirect labor costs used to support the manufacturing process or make it more efficient are also included.

Some examples of indirect labor are as follows:. Indirect costs are those expenses that are not directly related to the production or acquisition of products. Nevertheless, they are essential in the calculation of the total cost of sales. Several examples of indirect costs are below:.

Business owners must know the profitability of their businesses to identify nonperforming areas that need improvement. Calculating the cost of sales is an important tool that provides data on the efficiency of a company's production process. Keeping track of the cost of goods sold yields information about which products are profitable and should be promoted and which products should be eliminated. James Woodruff has been a management consultant to more than 1, small businesses.

Simply add together the labor cost, the components cost, the tools cost, the marketing costs and the overhead cost. Detail all of your costs. The first step to calculating appropriate prices for your wholesale products is to detail all of your costs, including Cost of Goods Sold COGS and overhead costs. Your COGS represents how much you spend to acquire the products that you'll resell.

This includes costs such as:. This list is by no means exhaustive, so think about the specific expenses your business incurs. For example, you might also want to consider the cost of inventory shrinkage due to theft or damage. Calculate cost price per unit. In this case, the cost price per unit would be:. Work out your profit margin.