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# How to calculate the cost of production

The cost in the classical sense refers to the amount of costs incurred by the company for the production (production) and sales (cost of sales) of its products. The sum of the costs of production and sale of goods is called the total cost. The cost is calculated both for the entire output and for the production of a specific item.

Production cost includes the costs of the production phase. These costs include:

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

payment for packaging goods;
transportation costs (delivery of goods to the buyer or to a distribution warehouse);
other costs.
For cost analysis, use the following statistical methods:

The grouping method consists in grouping all costs for homogeneous elements with subsequent grouping into costing items.

The use of cost groups allows you 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 (elements or costing items) in the cost structure to determine the impact of articles on the overall result (tab. 2).

The graphical method makes it possible to visually present an analysis of the cost, the dynamics of its change and the change in structure in graphical form. In the following figure, we will vividly demonstrate the use of several cost analysis methods.

Thanks to such a diagram, one can clearly demonstrate the dynamics of the change in the cost of production by periods and the main reasons for its change. The graphical method of cost analysis is most preferable for the preparation of information for the top management of the company, because it is the most digestible.

Cost calculation methods
The two main methods of cost calculation, which are used in practice, are:

full cost absorption method;
marginal method (direct costing).
The method of full cost absorption involves the calculation of 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 types of products.

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

Variable costs – the value of which directly depends on the volume of production. These costs include: the cost of the main raw materials and 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 lies in the fact that the company 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 do not include the cost of each unit of production, and take into account the entire output. Justification of such a method arises when it is necessary to make a decision on the expediency of issuing a particular type of product.
With different approaches to the calculation of costs, 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, the sale of finished products – 950 tons. The price of products sold – \$ 100 / ton.

The difference between the two methods is to account for the cost of residues. With the marginal method, an increase in balances reduces operating profit, while with the method of full cost absorption, on the contrary, it increases.

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

EBITDA cost is the sum of expenses for both production and sales of products without depreciation.

In this case, the indicator of the efficiency of the enterprise is taken EBITDA – profit before tax excluding depreciation.