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Report on
Overview of Production Cost
By
B.S.S.Kapil
1
st
MBA
13551E0052
By
Naga Lakshmi
1
st
MBA
13551E0051
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Production Cost
Definition:
A cost incurred by a business when manufacturing a
good or producing a service. Production costs
combine raw material and labor. To figure out the
cost of production per unit, the cost of production is
divided by the number of units produced. A company
that knows how much it will cost to produce an item,
or produce a service, will have a clearer picture of
how to better price the item or service and what will
be the total cost to the company.
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Overview of Production Cost
Steps:
1.Identify the cost object;

2.Identify the direct costs associated
with the cost object;

3.Identify the overhead costs;

4.Select the cost allocation base to
use in assigning overhead costs to
the cost object;

5.Develop the overhead rate for
allocating overhead to the cost object.

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Cost object: A cost object is anything that we want to know the cost of. We
might want to know the cost of making one unit of product, or a batch of
product.

Direct Costs: Direct costs are costs that can be directly attached to the unit
under consideration. Direct costs are also called prime costs. For
manufacturing companies, direct costs usually can be categorized as either
materials or labor.

Overhead Costs: Overhead costs are costs that are related to the cost object,
but cannot be traced to the cost object in an economically feasible way.
Overhead costs are not directly traceable to specific units of production.
Electricity
Factory office salaries
Building and machine maintenance
Factory depreciation

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Cost allocation base: A quantitative characteristic shared by
multiple cost objects that is used to allocate overhead costs
among the cost objects. A cost allocation base can be a financial
measure or a nonfinancial measure
the number of units produced by the factory during a period of
time

Overhead Rates: The overhead rate is the ratio of cost pool
overhead dollars in the numerator, and the total quantity of the
allocation base in the denominator:


Overhead rate

Overhead costs in the cost pool

=
Total quantity of the allocation base
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Conclusion
Production costs can be used to compare the
expenses of different activities within the
company. In businesses that know their
production costs know the total expense to
the production line, or how much the entire
process will cost to produce the item.
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Conclusion
Production costs can be used to compare the
expenses of different activities within the
company. In businesses that know their
production costs know the total expense to
the production line, or how much the entire
process will cost to produce the item.