Novice entrepreneurs who decide to engage in the production of goods or services need to know how much it will cost them to create their own product. Planning the cost of production allows you to correctly plan the organization’s budget and avoid numerous financial losses. These calculations should be carried out at the stage of drawing up a business plan, on the basis of which all further work of the enterprise will be carried out.
Why it is necessary to consider the cost of production of a product?
The costs incurred by the company engaged in the production of goods and services, and are the total cost. It includes money spent on the purchase of raw materials and the further manufacture of the desired product from it, on staff salaries, the solution of logistical problems, general marketing, as well as the sale of goods. Timely planning of production costs seems simple enough, but this task is usually assigned only to specialists with extensive experience in accounting.
It is important that recalculations of the cost of creating goods and services be made at least once a quarter, or even more often. This is necessary in order for the calculations to be truly correct, since a number of external volatile factors can affect the cost. One of them is the price of raw materials, they can also be periodically adjusted both upwards and downwards.
Beginning businessmen often do not have the opportunity to use the services of a professional accountant, so they have to calculate the cost of goods themselves. Such parameters as the amount of initial costs, payback periods, margin, etc. will depend on the correctness of the calculations. Based on the calculations, you can also determine how business will be cost-effective.
What is the cost of doing?
Before planning the cost of production and services, it is necessary to find out what it consists of in order to prevent mistakes. First of all, we are talking about the costs of acquiring the necessary materials for the manufacture of goods, purchase of fuels and lubricants, equipment operation. Next, you should take into account the remuneration of employees who work at the enterprise, contributions to the FSS, FFOMS and PFR, rent of production facilities, advertising costs.
If we are talking about social organizations, you will need to spend additional amounts on various promotional events. All costs must be taken into account in the general cost estimate, this will allow to determine the maximum bottlenecks in existing processes and adjust the operation of the enterprise so that it makes a profit.
What does not apply to these calculations?
Planning the cost of production should be made without taking into account a number of factors, which at first glance must be included there. It should include the expenses that the company incurred in connection with the freezing of its own projects or with the maintenance of unused capacities. Litigation and various fines will not be included there either, since they are not related to direct proceedings.
Accountants also believe that in the calculation of the cost of creating goods and services do not need to pay receivables. In their opinion, the cost is a sufficiently variable and flexible structure, so you need to devote a huge amount of time and effort to make the calculations correctly.Mistakes can lead the company to high costs, and in some cases even to complete closure.
What calculation methods are used in practice?
Accountants are constantly trying to find the best method for planning production costs, but each time they fail, because various goods and services may require special treatment. To date, two most suitable methods are used for calculations at once, the most common of which is the normative one. It involves the use of absolutely all norms related to the resources used in the creation of goods and services.
Another option is planning based on technical and economic indicators. This includes the introduction of technical innovations in the reporting period, which could affect production. It is also necessary to take into account organizational indicators, these include: changes in the form of labor and the composition of workers employed in production, as well as adjustments to specialization and work capacities.
Methods of planning the cost of production must necessarily take into account the slightest changes in the quantity of goods and services produced, their assortment and nomenclature. It can also be affected by the sharp jump in inflation that occurred in the reporting period. You should also consider various specific factors that are present in absolutely every business. For example, changing the conditions for the supply of fuel can also have a serious impact on the cost of organizing a bus tour.
What are the types of cost of production of goods?
Planning of production costs and the cost of production should be carried out taking into account the types of the latter. Most often, the documentation refers to the full cost of creating the product, it includes absolutely all the costs that the company incurred. To understand whether the enterprise is moving in the right direction, they use marginal cost calculations, which show the price of creating an additional unit of goods. Based on these data, it is possible to increase or decrease production volumes.
If the owners of the organization plan to optimize their own costs, they first look at the shop floor production cost of the goods, which consists of the costs that all departments of the institution incurred. The production price of creating one unit of goods combines the shop floor, as well as target and total costs. The general cost of the product is an indirect indicator, since it has little to do with its direct creation.
The actual and standard cost of creating goods is also taken into account in the preparation of the production plan. However, the planning of the cost of production at the enterprise in this case is not entirely accurate, since only the approximate standards presented by the finished goods production unit are used.
What tools can be used for settlements?
To plan the costs and cost of production, you can do with a simple technique - costing, it is with its help that the accountant receives accurate data in the shortest possible time. All costs arising from production should be classified. Based on the company's business processes, specialists choose one of the most convenient types of costing.
For example, direct costing, when an accountant writes off indirect costs arising from implementation and works only with direct costs. The order method is used to calculate the production cost of one unit of goods, it is especially convenient when creating an exclusive product, for example, a truck with a body increased by 1.5 times.
For planning and calculating the cost of production, you can also use the alternate method.It is perfect for mass production, when the creation of goods is divided into several stages. Each stage of production should be counted and taken into account in the general register of expenses, only then can honest numbers be obtained. For example, if we are talking about the production of sparkling water: at the first stage, raw materials are prepared, at the second stage, the product is created, and at the third stage is the packaging of the received goods.
If only one simple technology is used to create a product, you can use the process-based method. Choosing the most suitable method for planning, accounting and calculating the cost of production allows you to make the most correct calculations, and then perform competent budgeting.
What calculation errors should be avoided?
Experienced accountants know that when planning the cost of production, work, services and goods in the calculations errors may appear. It is worth noting that here they appear in much larger numbers than when solving other economic issues. All errors can be divided into calculated and substantial, the first appear by chance, and the second - with the initially incorrect choice of indicators.
You should also be aware of errors that occur [due to the use of the wrong base on which the calculations will be made. A frequency error is a situation when instead of marginal income, turnover is used in the calculations. Sometimes, when calculating on one base, a product turns out to be profitable, but when using another, it doesn’t. To avoid errors, it is recommended to involve several accountants at once to carry out the calculations, who will be able to double-check each other and correct the identified inaccuracies.
How to fix the cost of production of goods?
Planning and accounting of production costs is carried out using statistical methods of analysis of the production process. Most of the costs in creating goods and services are for the purchase of raw materials, which is why when calculating it is necessary to focus on it. It is important to track whether all the source material is actually used to create the product, which in this case may be errors from the established norm. These data should also be taken into account, since they allow significant savings.
To optimize the output of goods, it is often enough indicated what will happen if the raw materials used are replaced by completely different ones. Monitoring the current state of production and materials is carried out using an inventory that should be performed at least once a week, or even more often.
Cost accounting will also include an analysis of how efficiently the production department works. If there are any objective reasons why the creation of goods occurs with a noticeable delay, and this affects their cost, then the company's management immediately tries to eliminate the shortcomings. When carrying out these works, costs can seriously increase, and this can affect the reduction in total cost.
How can you reduce the cost of producing goods?
The dream of almost every experienced businessman is to reduce prices for the production of their goods, but at the same time increase the cost of their sales. Planning to reduce the cost of production is possible only after a detailed study of absolutely all costs. In parallel with this, it is necessary to take into account the profitability of the goods and revenue for each employee for the past reporting period. The latter clearly shows the efficiency of the enterprise, if it decreases - this is a signal of the need to optimize work processes and the presence of indirect costs that negatively affect the budget.
Pay attention to the presence of various assets in your property.For example, if you do not have your own premises and you are forced to rent a base for production, you can reduce the cost of production by moving to a more acceptable building with favorable terms of employment. If you have your own property, you should use absolutely all of its capacities to make a profit and cover all costs, perhaps organize work in two or even three shifts.
Work with suppliers should also be analyzed if necessary to reduce the cost of production of goods. If you are a major client for organizations from which you buy raw materials, it makes sense to try to agree on various discounts and bonuses, provided that the volume of purchases grow. Pay attention to the stocks of your warehouses and receivables - this is where most of the money in your company is frozen. If during the analysis you notice that large shipments bring less money, adjust the working mechanisms.
What is the most effective way to lower production costs?
Experienced financiers believe that only by increasing labor productivity can the cost of creating goods and services be reduced. This becomes possible only if a number of factors are observed, in particular, for this, only highly qualified employees should work at the enterprise. Due to this, it is possible to reduce poorly trained specialists and those who can not cope with their work. The decrease in the number of staff will affect the wage budget, and later on the finances spent on the creation of goods and services.
When planning to reduce the cost of production, you should consider how well organized workspaces are in your enterprise. If modern equipment is used for production, then you will spend much less money on electricity, and the number of defective products will decrease significantly. Due to this, it will be necessary to review the scope of the supplied raw materials and the costs laid down for this.
Reducing the cost of production of goods can also be achieved by expanding the specialization of the company and changing the management staff. Administrative activity can be carried out by a limited number of employees, and since it affects the total cost of production, the benefits of dismissing extra specialists will be noticeable in the next reporting period.
Why do you need a cost plan?
An official document that spells out all the necessary calculations to clarify the cost of creating the goods must exist at each enterprise. Planning the cost of production must necessarily include an estimate of the costs of its direct production, additional price calculations of existing samples and those already sold. It should include a comparison of the estimated costs of developing and creating individual goods and services, as well as information on how to reduce them.
All products must be divided into comparable and incomparable. Under the first understand the one that was created last year, and is not included in the current reporting period. This should also include goods whose production cycle is very large, which were released individually. This cannot include third-party orders, major repairs, internal services of the enterprise, as well as products that were manufactured as an experiment. The second should be understood as goods and services created in the current reporting period.
When planning the cost of production, real figures should also be formed, with which the management of the enterprise will decide on the expansion or reduction of production. With its help, you can further draw up the correct business plan that can lead the company to success.