Production Costs
Candlefocus EditorProduction costs can be divided into two main categories of costs: direct materials and direct labor costs. Direct materials are the materials used to manufacture a product, including all components, parts, and raw materials. Direct labor costs, on the other hand, include all labor costs associated with the production, such as wages, benefits, and payroll tax expenses.
These two main components of production costs are then broken down further into variable costs and fixed costs. Variable costs are any costs that change in direct proportion to the production volume. Examples include direct materials, parts and raw materials, supplies, equipment maintenance, and shipping. Fixed costs are any costs that remain constant regardless of the amount of production, such as overhead or insurance expenses.
The total product costs can be determined by adding together the total direct materials and labor costs, as well as the total manufacturing overhead costs. The overhead costs include all necessary expenses needed to operate the business outside of the production process, such as rent, utilities, advertising and marketing, legal fees, and administration costs.
When assessing a business’s production costs, it’s important to not only consider the total cost of production, but also how costs are allocated between direct and indirect materials, direct and indirect labor, and fixed and variable costs. This information can then be used to better manage budgets, adjust prices, and increase overall profitability. By understanding and tracking production costs, businesses can better manage their production process and maximize their returns.