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How to calculate product cost

Prime cost of the made or realized production is one of the most important indicators for the analysis of efficiency of a production activity as the enterprises in general, and its separate structural divisions. So, we will tell readers of that such prime cost and as it is possible to calculate it.

Prime cost in classical understanding call the sum of expenses which was incurred by the enterprise for production (production) and realization (cost of sales) of the production. The sum of costs of production and sale of goods is called as full prime cost. Prime cost is estimated, both on all release, and on production of a concrete commodity unit.

Production prime cost includes costs of a production stage. Are a part of such expenses:

  1. Payment for raw materials and main production materials.
  2. Fuel and energy expenses.
  3. Salary.
  4. Transportation costs (internal displacement of raw materials and semi-finished products).
  5. Repair and maintenance of fixed assets.
  6. Other expenses.
  7. Depreciation of fixed assets and NMA.

Include in cost of sales expense which are incurred by the enterprise at a stage of product sales. Treat such expenses:

  • payment on packing of goods;
  • expenses on advertizing;
  • expenses on transport (delivery of goods to the buyer or to a distributor warehouse);
  • other expenses.

For the analysis of prime cost use the following statistical methods:

The method of group – consists in groups of all expenses on uniform elements with the subsequent group in articles of accounting (tab. 1).

Use of groups of expenses allows to carry out the analysis of performance of planned indicators at the average and top level, after all budgeting of expenses at the lowest level is impossible, especially in the conditions of the big enterprises.

The method of average sizes – consists in calculation of weight of expenses in structure of production prime cost. This method allows to determine the specific weight of separate expenses (elements or articles of accounting) in structure of prime cost for definition of influence of articles on the general result (tab. 2).

Graphically such structure it is possible to represent as follows (fig. 1).

In fig. 1 it is visible that in structure of the general expenses costs of raw materials and materials have the greatest specific weight, respectively, variability under this article will have a greater influence on variability of the general result.

The graphic method gives the chance visually to submit the analysis of prime cost, dynamics of its change and change of structure in a graphic look. In the following drawing we will visually show use of several methods of the analysis of prime cost.

Thanks to such chart it is possible to show visually dynamics of change of prime cost on the periods and the main reasons for its change. The graphic method of the analysis of prime cost is most preferable to preparation of information for top management of the company because is the most acquired.

Prime cost calculation methods

By two main methods of calculation of prime cost which are used in practice, are:

  • method of full absorption of expenses;
  • marginal method (direct costing).

The method of full absorption of expenses assumes calculation of prime cost of each unit of production taking into account all expenses. This method is applied in case it is necessary to analyse profitability of separate types of production.

The marginal method is based on cost sharing on two parts:

  1. Variable expenses – which size directly depends on output. Treat these expenses: costs of the main raw materials and materials, energy consumption, transport. Variable expenses are calculated on unit of each type of goods.
  2. Constant expenses – which size does not depend on output. The essence of these expenses is that the enterprise will bear them, irrespective of, whether it will let out in general final goods. Treat such expenses: salary, costs of repairs of fixed assets. These expenses do not carry on prime cost of each unit of production, and consider on all release. Correctness of such method arises in case of need making decision on expediency releases of this or that type of goods.

At various approaches to calculation of expenses, the financial result can be a miscellaneous.

Let's consider a situation:

The enterprise lets out 1000 tons of metal rolling. Variable costs of release of one ton – 60 dollars/ton, constant expenses – 30000 dollars, realization of finished goods – 950 tons. The price of the realized production – 100 dollars/ton.

The difference between two methods consists in the accounting of prime cost of the remains. At a marginal method the increase in the remains reduces operating profit, and at a method of full absorption of expenses – on the contrary, raises.

In the international account the concept of prime cost is replaced with the concept EBITDA cost.

EBITDA cost represents the sum of costs both of production, and on product sales without depreciation.

In that case EBITDA – profit to the taxation without depreciation is accepted by an indicator of overall performance of the enterprise.

EBITDA = Variable contribution – Fixed costs, where:

  1. Variable contribution – marginal profit which pays off as a difference between NRP (at the price of realization) and VC (variable expenses) increased by realization volume.
  2. Fixed costs – constant expenses.

Prime cost of the made goods can pay off on the basis of data on the actual expenses (actual cost), and on the basis of standards of the expenses calculated on the basis of the approved norms of expenses for each element (standard prime cost). Standard prime cost is often applied to pricing process, to the conclusion of long-term contracts.

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