What are production costs?

Production costs are the costs associated with manufacturing a product. These include direct and indirect costs, which can be broken down as follows:

  1. Direct costs can be directly attributed to a specific product or project. For example, suppose you're making plastic bottles in your factory and paying the workers who maintain the production line. In that case, their hourly wage is considered a direct cost because it's directly related to producing the bottles. If you have a machine that does nothing but melts the plastic for the bottle caps, this would also be considered a direct cost because it's used only for making the bottle caps.
  2. Indirect costs cannot be directly attributed to any product or project but instead benefit multiple products or projects equally over time or space (like electricity).

How are production costs tracked?

Tracking production costs can be done in a variety of ways. For example, you can track your production costs by hand or with the help of technology. You may also choose to track them on paper or electronically, at the individual level or the group level.

A major benefit of manually tracking your production costs is that it allows you to understand how each part of your business works together—and why specific changes might improve efficiency and profitability. This knowledge can help guide future decisions about managing expenses so, they don't become too costly over time (or vice versa).

Who is responsible for tracking production costs?

The answer is different depending on your company and its size. If you're working at a small business or startup, you'll be in charge of keeping track of production costs. In this case, it's important to understand how much each item costs so that you can make sure each product sells for enough money that covers its manufacturing expenses plus some profit margin.

Suppose you work at a larger company where multiple departments are responsible for different aspects of product development and sales (like design and marketing). In that case, chances are someone else will track production costs on their end before passing them along to whoever needs them—which could mean accounting or finance department employees depending on their roles within these divisions (or even someone from operations).


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How are production costs calculated?

Production costs can be calculated using different methods, from simple to complex. The method used depends on the type of business and product being produced. The most common methods include direct and indirect methods.

  • Direct method: this involves adding up all direct labor costs associated with production, including wages paid directly to workers or subcontractors who are working on your project; materials purchased for use in making your product (such as raw materials); rental fees for machinery or equipment used during production (e.g., tools needed for construction projects); utilities such as electricity and water consumed while making items at your factory—anything that can be attributed directly to producing products counts under this category.
  • Indirect method: this involves adding up all of the indirect manufacturing costs, including repairs and maintenance; salaries and wages of the indirect manufacturing personnel such as production supervisors, material handlers, and factory support personnel; factory supplies or outside services of manufacturing.

Direct manufacturing costs calculation

To calculate the direct manufacturing cost, you need to add up the cost of the raw materials, labor costs, and allocated manufacturing overhead (AMO). To calculate the total manufacturing cost, you can use the following formula:

Raw materials + Labor costs

+ Allocated manufacturing overhead

= Manufacturing cost

For example, let’s say you manufacture copper wire. You first need to calculate the total cost of your raw materials (in this case, copper). This is done using a separate calculation:

Beginning inventory + Purchases added

− Ending inventory

= Cost of raw materials

For example, if the raw materials total is $200,000 at the beginning and the company purchased an additional $100,000 in materials, the new raw materials total is $300,000. If, at the end of the production cycle, the raw material inventory of $50,000, that means the total cost of the raw materials is $250,000.

$200,000 + $100,000 - $50,000

Cost of raw material = $250,000

You can take your raw materials total of $250,000 plus your labor costs and AMO to calculate your total for manufacturing.

Indirect manufacturing costs calculation

Manufacturing overhead (MOH) is the sum of all the indirect costs. To calculate the total MOH, you need to use the following formula:

Manufacturing overhead of one unit

× total # of units


For example, let’s say you make plastic water bottles at your production facility. The cost of making one bottle is 0.50 cents. You make 150,000 water bottles at the end of the year. So you multiply 0.50 x 150,000 and get a total MOH cost of $75,000.

Why is it important to track production costs?

Tracking production costs is important because it helps you make informed decisions about future productions. If you're considering making another product, for example, and want to know how much money it will cost to produce and sell that product, tracking your production expenses will help.

You can also use this information when negotiating with suppliers or retailers—if a supplier wants to increase costs, then knowing their actual expenses means that both sides may be able to reach an agreement on price based on objective data.

Some additional benefits of tracking production costs include:

  • It can track the total performance of the business.
  • It can be used to compare different products.
  • It can also calculate the profitability of the business, as well as its return on investment (ROI).

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Production costs can be calculated using many different methods, from simple to complex

Regardless of how you calculate your production costs, it’s important to track them to keep your business in line with production and financial targets.

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