In the production process, in order to take into account the efficiency of the enterprise manufacturing goods or providing services, it is necessary to control the costs incurred. The main and most common indicator is the concept of production costs.
By calculating the cost, it is possible to determine how much cost was spent on the production process, and in accordance with this, determine the amount of required markup for selling products or determining the price of services rendered.
Cost concept
Cost is the sum of all material costs for the production of various goods and services according to a given specialization of the activity.
The concept of production costs includes basic expenses, such as:
- purchase of materials for the manufacture of products and fuel;
- the use of vehicles and special equipment (fixed assets);
- salary and payment of social benefits to employees of the enterprise;
- tax and other contributions to the state budget.
In addition, the final amount may include other expenses necessary for the manufacture and sale of products and services.
The role of cost in financial statements
Cost is an important element for the preparation of financial statements, since the concepts of cost and cost of production have a direct relationship with each other. According to the calculated costs (costs) for the production of products, by adding additional costs (depreciation, tax, insurance, wages, rents, etc.), you can calculate the cost.
Using these indicators, the final price for the sale of manufactured goods or services is established. The higher the cost of production, the higher the cost of production, which includes sales costs, and added value, and wages to employees.
Cost and Cost
The concepts of costs and production costs are also interrelated quantities. Cost determines the list of costs in relation to a given period of time, which is necessary for the manufacture of goods.
The costs of the current stage are included in the cost of production made during the current production process. In turn, expenses for subsequent periods are not included in the cost of goods currently produced. They will relate to the cost of production of the next stage of time.
Expenses for subsequent periods are expenses for which funds have not yet been allocated, but are already reserved. Thus, in the concept of production costs and costs play a leading role.
Cost function
The concept and essence of the cost of production are explained by the following functions:
- calculation of allocated material resources for the manufacture and delivery of products;
- formation of the price at which the sale will be made;
- determination of the level of profitability of the enterprise;
- substantiation of investments in modernizing the enterprise, introducing innovative technologies and improving production processes;
- rationale for making decisions on the introduction of various changes.
Thus, the cost plays an important role in regulating the production process, in improving the existing methods of work and in the sale of manufactured goods to buyers and resellers.
Cost types
The concept of the cost of production, work and services can be of several types according to various factors by which the classification is made. These factors include:
- the amount of manufactured products or services provided;
- purpose, according to which the cost will be calculated;
- the scope of production processes;
- type of enterprise producing products and specification of the work it performs.
Depending on the intended purpose, the cost price can be calculated by various methods.
Cost of production
The concept of production costs can apply to both a unit of goods and its full batch. Depending on this, there is a classification according to the number of products: the cost of one product and the cost of all production.
The cost of production of an enterprise is the main characteristic for determining the cost of manufacturing one unit of goods and calculating the effectiveness of the production of a particular product at the level of one enterprise or site.
The cost of production for the entire enterprise can be calculated in the estimate for production. The cost of one unit of the product is calculated using calculation methods, which are most accurate due to the accurate consideration of available production factors.
Purpose cost
The concept of the cost of production and services, depending on the purpose, is divided into two types: planned and actual.
The planned cost is determined by the norms and prices set for manufactured products, and the actual cost is calculated by the values calculated in the reports, including the costs of various non-productive needs (for example, damage or loss of goods in accordance with established standards).
The value of planned cost is leading to determine the direction of modernization and improvement of the enterprise, increase the level of production equipment and reduce the consumption of raw materials for the manufacture of goods. For this, special events are organized where similar organizational and technical issues are solved.
Cost of production coverage
The concept and types of cost of production also include classification according to the breadth of production and sales. At this level, distinguish the full, production and district value.
The local prime cost includes the costs of servicing the workshop to perform a given type of work. This is the sum of the following elements: the cost of basic and auxiliary materials, electricity, wages and a social package of workers, depreciation of instruments and equipment located on the premises of the workshop.
Production cost reflects the amount that the entire enterprise spent on the production of the product in question. This value includes: costs of raw materials, fuel and electricity, remuneration of labor and social benefits, depreciation of all instruments and equipment available at the enterprise.
The full cost, in addition to the above costs, includes the costs of the sale of finished products: delivery, transportation, payment of maintenance of organizations for the sale of products, etc.
Cost by type of enterprise
For enterprises producing different types of goods and services, the concept of production costs may include different components of production. For organizations with special working conditions, the cost of production is calculated in a special way. For example, for mining operations, the cost of exploration studies is taken into account.
Similarly, calculate the desired value for other types of work, summing up all the costs incurred in the production process. To calculate the cost per unit of production, the cost of production for the whole year is divided by the volume of manufactured goods in physical quantities. In this case, an approximate value of the cost is obtained. For the exact value, a calculation is carried out.
Economic elements of cost
For economic indicators, the concept of the cost of production of an enterprise includes two parts of expenses, which can be divided into costs by economic elements and calculation items.
The economic elements include:
- financial costs for the production of goods;
- salary expenses and employee benefits package;
- depreciation deductions;
- and other possible costs incurred in the production process.
Financial costs include:
- the price of procurement materials for the manufacture of products;
- the price of procurement materials for non-production needs;
- the price of parts for the manufacture of products and semi-finished products;
- the price for work carried out by third parties;
- price for natural resources;
- the price of fuel, which is necessary for the smooth operation of machinery and equipment, as well as space heating and other purposes;
- the price of the purchase energy necessary for the production and non-production needs of the enterprise.
From the amount of financial costs received, the cost of waste received in the manufacturing process and sold to third parties is deducted. Waste in this case is the remains of materials, fuel, semi-finished products and other used resources that were generated during the production period and lost the properties and qualities necessary for production purposes. They are sold at a price below the original purchase or at the full price, depending on the properties.
Financial costs in cost of sales
The above costs are an integral part of the cost of production. Each of them includes a certain group of expenses.
Salary costs include labor costs of employees involved in the production and sale of products, as well as bonuses, incentives and other payments. Social package expenses include deductions for medical care, social insurance and pension funds.
Depreciation deductions are expenses for restoration and repair of machines, instruments and equipment involved in the production process.
Also, the full amount may include other expenses: tax deductions, payments on existing debts, expenses for advanced training of employees, paying rent, contributions to the property insurance fund, expenses for repairing equipment, etc.
In addition, the actual cost includes the possible costs of warranty service during the specified period, losses from marriage and forced production downtimes, payments to employees in the event of industrial injuries, and lack of funds and resources in the absence of the accused.
Costing
The work of calculation is one of the basic concepts of the cost of production produced in accounting at the enterprise. Calculation is made in compliance with current prices for fuel, semi-finished products and raw materials necessary for the manufacture of goods.
The calculation is made according to the relevant articles corresponding to the necessary cost group. These include:
- attitude to the manufacturing process;
- attribution to own price;
- relation to the working volume of production.
As a result of the calculation, they receive the full amount of expenses necessary for the production of a product, acting on the price level of the specified time. This amount corresponds to the cost required to perform further calculations.
Costing is the most accurate way to determine cost as it does not use averaged values. In the calculation process, you can take into account any available factor of production with the necessary cost.
Cost value
In conclusion, we can say that the concept of the cost of production is the leading one for determining the costs of producing goods or services. Using this value, you can determine how efficiently the enterprise operates, where there are large losses and costs, and how the production process can be improved.
The cost price takes into account not only production, but also non-production costs, so it carries more information than the value of production costs. In addition, relative to the cost, the added value of the final product is calculated upon sale.
Thus, in order to prepare the correct financial statements of an enterprise manufacturing goods or providing services, it is necessary to calculate the cost of the production process.