Methods for calculating the cost of production. Fixed costs per unit of output

2024 Author: Howard Calhoun | [email protected]. Last modified: 2024-01-17 18:37

The cost of production is an important economic indicator that reflects the efficiency of production activities. Therefore, it is so important to be able to correctly carry out calculations and draw reasonable conclusions. Let us consider in more detail the main types, methods of calculation.

Essence

Calculation is the process of grouping all costs associated with the manufacture of products into economic elements. This is a way of calculating expenses in terms of money. The main methods of costing: boiler, per-order and order-by-order. All other costing methods are a combination of the methods listed above. The choice of one or another payment method depends on the industry specifics of the organization's activities.

An equally important issue is the choice of the settlement object. It depends on the entire system of management and analytical accounting, for example, on the division of costs into direct and indirect. Calculation objects are expressed in:

• natural units of measurement (pieces, kg, m, etc.);
• conditionally naturalparameters, which are calculated by the number of product types, the properties of which are reduced to the main parameters;
• conventional units are used to measure goods, consisting of several types; one of the species is taken as a unit for some attribute, and the calculation coefficient is set for the rest;
• value units;
• time units (for example, machine hours);
• work units (e.g. ton-kilometer).

Calculation tasks

They are as follows:

• competent substantiation of calculation objects;
• accurate and reasonable accounting of all expenses;
• accounting for the volume and quality of manufactured products;
• monitoring the use of resources, adherence to approved maintenance and administration costs;
• determining the results of the work of units to reduce costs;
• identifying production reserves.

Principles

Production costing methods are a set of reflecting the costs of manufacturing products, by which you can determine the actual cost of a particular type of work, or its unit. The choice of one or another calculation method depends on the nature of the manufacturing process. The use of calculation methods intended for single-production organizations at enterprises producing heterogeneous goods distorts data on the profitability of products and “smeares” costs. When calculating the costs of industrial production, the costs of WIP at the end of the year are excluded from the amount of expenses.

Cost calculation methods allow you to:

• study the process of forming the cost of specific types of goods;
• compare actual costs with planned ones;
• compare production costs for a particular type of goods with the costs of competitors' products;
• justify product prices;
• make decisions to produce cost-effective products.

Expense items

The total cost of manufacturing products includes the cost of:

• purchase of raw materials;
• acquisition of fuel, including for technological purposes;
• worker wages and social contributions;
• general production, housekeeping expenses;
• other production costs;
• business expenses.

The first five cost items are production costs. Selling costs reflect the amount of costs for the sale of goods. These are the costs of packaging, advertising, storage, transportation. The sum of all listed items of expenses is the full cost.

Types of expenses

Classification of cost accounting methods provides for the division of costs into groups. Direct costs are directly related to the manufacturing process of the product. These are the first three items of expenditure listed. Indirect costs are allocated to the cost of products through certain ratios or percentages.

These two groups of expenses can be very different depending onactivity specifics. In mono-production, direct costs include absolutely all costs, since the result is the release of one product. But in the chemical industry, where a range of other substances is obtained from one raw material, all costs are attributed to indirect ones.

There are also variable and fixed costs per unit of output. The second group includes expenses, the amount of which practically does not change with fluctuations in the volume of output of products. Most often, these are general production and business expenses. All costs, the volume of which increases with the growth of production, are variable. This includes the amount of funds allocated for the purchase of raw materials, fuel, salaries with accruals. The specific list of cost items depends on the specifics of the activity.

Ketlovy (simple) way

This is not the most popular calculation method, because it allows you to display information about the amount of costs for the entire production process. This calculation method is used by single-product enterprises, for example, the coal mining industry. In such organizations there is no need for analytical accounting. The cost price is calculated by dividing the total cost by the volume of production (in the example considered, the number of tons of coal).

Custom method

In this method, the calculation object is a specific production order. The cost of production is determined by dividing the amount of accumulated costs by the number of manufactured units of goods. The main feature of this method iscalculation of costs and financial results for each order. Overhead costs are accounted for in proportion to the distribution base.

The custom costing method is used for single or small-scale production, in which the manufacturing process lasts longer than the reporting period. For example, in machine-building plants that create rolling mills, power excavators, or in the military-industrial complex, where processing processes prevail and rarely repeating products are manufactured. It is permissible to use this calculation scheme in the manufacture of complex or products with a long production cycle.

Expenses are accounted for by final products (completed orders) or intermediate products (parts, assemblies). It depends on the complexity of the order. The first option is used if the object is products with a short production cycle. Then all costs are included in the cost price. If we are talking about the manufacture of intermediate products, then the cost is determined by dividing the amount of costs for the order by the number of identical products.

Process costing method

This method is used in extractive (coal, gas, mining, oil, logging, etc.) industries, energy, processing industries. All of the above organizations are characterized by a mass type of production, a short production cycle, a limited range of products, one unit of measurement, the absence or a small amount of work in progress. As a result, the manufactured product isboth objects of accounting and calculation. Cost accounting is carried out for the entire production cycle and for a specific stage. At the end of the process, all costs are divided by the number of units of production. This is how the cost is calculated.

Alternate way

Based on the name of this method, it is clear that the object of calculations is the process, the result of which is the release of intermediate or final products. This method of calculation is used in mass production, where products are made by processing raw materials in several successive stages. Some product elements can only pass a certain number of limits and be released as intermediate products. A prerequisite is a phased production process, broken down into repetitive operations.

A feature of this method is the formation of costs for each completed redistribution or for a specific time period. The cost price is calculated by dividing the amount of expenses accumulated for a repartition or a period of time by the manufactured quantity of products. The sum of the production costs of each part is the cost of finished products. Direct costs are calculated by redistribution. To distinguish between costs between semi-finished products and GP, for each order, WIP balances are estimated at the end of the month.

The cross-sectional costing method is very material-intensive. Therefore, accounting must be organized in such a way as to control the use of raw materials in production. Most often, for these purposes,calculation of semi-finished product yield, rejects and waste.

Normative method

This method provides for a preliminary calculation of the cost of each product based on current estimates. The latter are recalculated in each period. Separately, costs are allocated according to norms and deviations with the identification of the causes of the latter. The cost price is calculated as the sum of standard costs, changes in these norms and deviations. The standard costing method allows you to calculate the cost before the end of the month. All costs are allocated to responsibility centers and matched against actual costs.

ABC method

Calculation algorithm:

• The entire organization process is divided into operations, such as placing an order, operating equipment, changeover, quality control of semi-finished products, transportation, etc. The more complex the organization of work, the more functions should be allocated. Overhead costs are identified with activities.
• Each work is assigned a separate cost item and its unit of measurement. In this case, two rules must be observed: the ease of obtaining data, the degree of correspondence of the received expenditure figures with their actual purpose. For example, the number of completed orders for the supply of raw materials can be measured by the number of contracts signed.
• The value of a cost unit is estimated by dividing the amount of expenses for an operation by the number of the corresponding operation.
• The cost of work is calculated. The amount of costs forunit of production is multiplied by their number by type.

That is, the accounting object is a separate operation, costing - the type of work.

Choice

Methods of costing are part of the process of organizing production, accounting and workflow at the enterprise. The choice of one or another calculation method depends on the characteristics of the enterprise: industry affiliation, type of products manufactured, labor productivity, etc. In practice, all these calculation methods can be used simultaneously. You can calculate the cost of orders by the ostentatious method or by using the norms of raw materials consumption. The chosen method should be written in the order on accounting policy.

Example

The company manufactures three types of products. It is necessary to develop a planned cost if it is known that the monthly production volume is: for product A=300 pcs., Product B=580 pcs., Product C=420 pcs.

Whatever calculation method is chosen, you need to determine the amount of costs per unit of product (table 1).

	Indicator	Expenses
		A	B	С
1	Material D (price 0.5 RUB/kg), kg/unit,	1	2	1
2	Material E (price 0.9 RUB/kg), kg/unit	2	3	3
3	Expenses of working time, h/unit	3	4	1
4	Wage rate, RUB/h	4	3	2, 5

Table 2 shows indirect costs.

	Cost item (rubles per month)	Place of origin
		Production	Implementation	Administration	Total
1	Wages and social contributions	400	610	486	1526
2	Electricity costs	260	160	130	520
3	OS Repair	40	10	40	100
4	Stationery	90	170	180	430
5	OS depreciation	300	100	150	550
6		-	80	-	80
7	Transportation	180	400	200	780
8	TOTAL	1270	1530	1186	3986

Calculate the amount of expenses using various costing methods.

Option 1

Determine the amount of direct costs for each product, based on the data in table 1:

Product A: (10, 5+20.9)300=690 RUB/month

Product B: (20, 5+40.9)580=690 RUB/month

Product C: (30, 5+30.9)420=690 RUB/month

The total amount of direct costs is 4702 rubles/month

Calculate the amount of labor costs for each type of product per month. To do this, multiply the labor intensity, the tariff rate and the volume of production:

Product A: 34300=3600 rubles/month

Product B: 23580=3480 RUB/month

Product C: 12, 5420=1050 rubles/month

Total spending is RUB 8130

The next step is direct costing, i.e. the calculation of the amount of direct costs.

Cost item	Product A	Product B	Product C
Direct material costs	2, 3	4, 6	3, 2
Salary and social security contributions	14, 89	7, 45	3, 1
Main direct costs	17, 19	12, 05	6, 3
Production volume	300	580	420
The total cost of the entire production volume	5157	6989	2646
TOTAL	14792

Determine the amount of indirect costs per unit of product:

• Production: 1270/1300=0.98 rubles/unit
• Sale: 1530/1300=1, 18 rubles/unit
• Administrative: 1186/1300=0.91 rubles/unit

Based on the calculations presented earlier, we determine the cost of manufacturing products:

Cost item	Product A	Product B	Product C
Direct unit costs	2, 3	4, 6	3, 2
Labor costs	14, 89	7, 45	3, 1
Direct Costing	17, 19	12, 05	6, 3
Indirect costs	0, 98
Production cost	18, 17	13, 03	7, 28
Project costs	1, 18
Administrative expenses	0, 91
Full cost	20, 26	15, 12	9, 37

This costing example is based on costing by dividing direct and indirect costs.

Option 2

Let's consider an example of costing, in which indirect costs are distributed depending on the complexity of the production process.

The calculation of direct costs has already been done in the previous example. Calculate the total labor intensity of the process:

Product A: 3300=900 hours.

Product B: 2580=1160 hours.

Product C: 1420=420 hours.

Determine the rates of distribution of indirect costs by dividing the amount of costs by the volume of production:

• production: 1270/2480=0.51
• implementation: 1530/2480=0, 62
• administrative: 1186/2480=0, 48

Determine indirect costs by multiplying the labor intensity of a unit of product by the previously calculated accrual rate.

Indicator	Indirect costs, rub.\units
	Product A	Product B	Product C
Labor intensity	3	2	1
Production costs (0.51 rate)	30, 51=1, 53	20, 51=1, 02	0, 51
Selling costs (rate - 0.62)	30, 62=1, 86	20, 62=1, 24	0, 62
Administrative costs (rate - 0.48)	30, 48=1, 44	20, 48=0, 96	0, 48

Based on the calculations presented earlier, we determine the cost of production:

Cost item	Product A	Product B	Product C
Direct unit costs	2, 3	4, 6	3, 2
Labor costs	14, 89	7, 45	3, 1
Direct Costing	17, 19	12, 05	6, 3
Indirect costs	1,53	1, 02	0, 51
Production cost	18, 72	13, 07	6, 81
Project costs	1, 18
Administrative expenses	0, 91
Full cost	22, 02	15, 27	7, 92

Yield

The profit of production is the income that remains from the proceeds after deducting all expenses. If prices for goods are regulated, then this indicator depends on the strategy of the manufacturer.

In modern conditions, the objects of direct regulation at the legislative level are the prices for gas for monopolists, electricity, freight rail transport, medicines important for life. On the part of local authorities, the object of direct regulation is a wider range of goods. It is determined depending on the social tension in the region and budget possibilities.

If prices are free, then profit is calculated according to the rate of return.

Example

The cost structure per thousand units includes:

1. Raw materials - 3 thousand rubles
2. Fuel, including for production purposes - 1.5 thousand rubles.
3. Salary of workers - 2 thousand rublesrub.
4. Salary accruals - 40%.
5. Production costs - 10% of salary.
6. Household expenses - 20% of salary.
7. Transportation and packaging - 5% of the cost.

You need to calculate the cost using the standard costing method and determine the unit price.

At the first stage, we calculate the amount of indirect costs per 1000 units of products:

• payroll accruals: 20000, 04=800 rubles;
• production costs: 20000, 01=200 rubles;
• household expenses: 20000, 02=RUB 400

Cost is calculated as the sum of expenses for all expense items, except for transportation costs: 3+1, 5+2+0, 8+0, 2+0, 4=7.9 (thousand rubles).

Packaging costs: 7.90.05/100=0.395 thousand rubles

Full cost: 7.9 + 0.395=8.295 thousand rubles; including per item: 8.3 rubles

Let's assume that the profit per unit is 15%. Then the price is: 8.31.15=9.55 rubles

Margin method

An equally important indicator of production efficiency is marginal profit. It is calculated at enterprises in order to optimize production - the selection of an assortment with greater profitability. When the equipment is fully loaded, the calculation should be carried out taking into account the maximization of profit.

The essence of the method is to divide costs into production and sales costs, fixed and variable. Direct are calledcosts that change in proportion to the growth in the volume of services provided. Therefore, the cost price is calculated only within the limits of variable costs. The main advantage of this method is that the limited cost makes it easier to record and control costs.

Marginal income is the excess of income from sales over indirect costs:

MD=Price - Variable Costs.

Example

We calculate the marginal profit for the manufacture of product A, the price of which is 160 thousand rubles, variable costs - 120 thousand rubles. For ease of calculation, we will assume that when demand changes, the amount of fixed costs is 1 million rubles.

	Indicator	Sales volume at a given level of production, thousand rubles
		50 tons	40 tons	55 tons
1	Price	7500	6000	8250
2	Variable costs	5500	4400	6050
3	Marginal profit	2000	1600	2200
4	Fixed costs	1000	1000	1000
5	PE	1000	600	1200

Change in profit margin is calculated as follows:

Increase in output by 5 tons: (55-50)(160-120)=200 thousand rubles;

Decrease in output by 10 tons: (40-50)(160-120)=-400 thousand rubles.

For enterprises that use semi-finished products in production, it must be taken into account that the cost of materials and manufacturing work in the cost of the final product is determined by all costs. All contingent costs are recognized in the reporting period and remain outside marginal costs.

You must also take into account the limitations in the application of this method. This will help avoid planning errors. The decision to increase the production of profitable and reduce the output of non-profitable types of products should be based not only on marginal income calculations. Plans for the development of the product range in the future, building up production capacity to meet demand, improving the cost management system are all equally important factors in business evaluation.