Product costing refers to estimating the cost of products and includes the direct costs (e.g., materials and labour) and indirect costs like production overheads. For the sake of the study, the cost of products results from dividing the total costs by the produced quantity annually. Estimating the direct costs of products is straightforward and can be done by calculating the cost of materials, packaging, waste and other direct costs (e.g., labour costs) for a product (or a job order); however, the problematic issues rely on the mechanism of allocation of production overheads (e.g., utilities and depreciations) over the produced quantity. Resolving this issue includes the simple average method when the total production overhead of the specific period (e.g., one year) is divided by the produced quantity. Other ways include using the percentage of the man-hours spent on every job order from the total man-hours or machine-hours consumed from the total machine-time spent on production over the year. Another way to estimate the production overheads of products is to apply a computer system called activity-based cost, which creates cost centres relevant to production job orders and assumes production overheads allocation percentages over job orders. Activity-Based Costing (ABC) is a method that assigns costs to specific activities or cost drivers within the production process, identifying the activities that consume resources and allocating costs based on the usage of those activities. Before choosing the method of cost accounting, set the costing assumptions about, for instance, the standard consumption criteria of direct costs for production job orders, the overhead allocation method, the system of cost accounting (e.g., job order or continuous system of accounting), cost of inputs, inventory costing system (FIFO, LIFO, or average costing), and more. The significance of product costs is driven by the results of allowing the management to accurately estimate the costs, set pricing, and plan profitability.
Step-By-Step Process
- Clarify the operating costs, production capacities, and sales projections illustrated in the previous sections of this study.
- Set cost accounting assumptions about the direct and indirect costs of production.
- Determine the various cost components of the overall product cost, including direct and indirect production costs, indirect sales and marketing, and indirect administration and general.
- Collect all necessary data and information related to each cost component.
- Estimate the direct cost of a product that includes the cost of materials, packaging, waste and other direct expenses (e.g., labour costs).
- Estimate the production overheads of a product, including costs like depreciation, utilities, maintenance, cleaning, equipment calibration, etc.
- Estimate the cost of marketing and sales of a product by dividing the total cost of sales and marketing by the quantity produced or sold over a year.
- Estimate the cost of administration and general of a product by dividing the total cost of sales and marketing by the quantity produced or sold over a year.
- Use a computer system to handle the cost accounting processes.
- List the product cost, judge them with your team, and consult experts.
- Evaluate and test costing results.
Example
| Products | Unit | Cost of Raw Materials ($/Unit) | Cost of Packaging ($/Unit) | Cost of Waste ($/Unit) | Other Factory Direct Costs ($/Unit) | Factory Indirect Costs ($/Unit) | Cost of Production ($/Unit) | Cost of Marketing ($/Unit) | Cost of General Adm. ($/Unit) | Total Cost ($/Unit) |
| Diabetic agent | 30 | 0.15 | 0.08 | 0.01 | 0.22 | 0.09 | 0.55 | 1.23 | 0.31 | 2.00 |
| Diabetic agent | 30 | 0.12 | 0.06 | 0.01 | 0.17 | 0.07 | 0.44 | 0.99 | 0.25 | 1.60 |
| Diabetic agent | 30 | 1.03 | 0.52 | 0.08 | 1.44 | 0.63 | 3.71 | 8.26 | 2.06 | 13.40 |
| Diabetic agent | 30 | 1.03 | 0.52 | 0.08 | 1.44 | 0.63 | 3.71 | 8.26 | 2.06 | 13.40 |
| Diabetic agent | 60 | 1.11 | 0.56 | 0.09 | 1.56 | 0.68 | 4.00 | 8.90 | 2.23 | 14.45 |
| Diabetic agent | 30 | 0.91 | 0.46 | 0.07 | 1.28 | 0.57 | 3.28 | 7.29 | 1.82 | 11.82 |
| Diabetic agent | 60 | 0.99 | 0.49 | 0.08 | 1.38 | 0.61 | 3.55 | 7.89 | 1.97 | 12.80 |
| Diabetic agent | 30 | 1.09 | 0.55 | 0.09 | 1.53 | 0.68 | 3.94 | 8.76 | 2.19 | 14.21 |
Useful Tips
- Follow up the processes shown above and adjust the cost account system to suit your specific project requirements.
Things To Avoid
- Avoid guessing works and assumptions without evidence.
- Avoid your judgement without team and expert contributions.
Final Note
This article is sourced from my new book- Your Guide For Preparing An Industrial Feasibility Study. For more information about the book: https://growenterprise.co.uk/book-your-guide-for-preparing-an-industrial-feasibility-study/To register in our newsletter: http://eepurl.com/ggcC29Or email us at: maldawood@growenterprise.co.ukThe author: Munther Al Dawood- Industrial Enterprise Expertwww.growenterprise.co.uk
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