Production Cost and Its Calculation - Desklib

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PRODUCTION COST
AND
ITS CALCULATION

CONTENTS
INTRODUCTION........................................................................................................................3
TRADITIONAL COSTING........................................................................................................4
COST- POOL................................................................................................................................4
MODERN METHOD OF COSTING.........................................................................................4
ACTIVITY- BASED COSTING.............................................................................................4
TRADITIONAL COSTING METHOD VS. ACTIVITY-BASED COSTING METHOD.. .5
HOW IS PRODUCTION COST PER UNIT CALCULATED................................................6
CASE STUDY ANALYSIS..........................................................................................................8
COMPARATIVE ANALYSIS OF THE TWO PROPOSALS................................................9
CONCLUDING THE ANALYSIS........................................................................................10
ADVANTAGES AND DISADVANTAGES OF PROPOSAL 1............................................11
Advantages................................................................................................................................11
Disadvantages...........................................................................................................................11
ADVANTAGES AND DISADVANTAGES OF PROPOSAL 2............................................12
Advantages................................................................................................................................12
Disadvantages...........................................................................................................................12
CONCLUSION...........................................................................................................................13
REFERENCES.............................................................................................................................14
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INTRODUCTION
Production costs is a cost that a business incurs while manufacturing any good or providing any
service (HUNDAL, 1997). The cost is related to both the material as well as the labor that is
required to manufacture or produce any product by the manufacturers. The material and labor
required are direct material and direct labor.
Production costs are divided into direct cost and indirect costs. The direct materials required and
direct labor required fall under the direct production cost head. This is due to the reason that
these cost can be traced very easily. For example, the cost of the staff maintenance falls under
this category. These direct cost are fixed costs of the business. They do not change even if there
is a change in the business economy.
On the other hand, indirect production cost is the manufacturing overhead costs because it is
not easy to trace these cost from the point of the product being manufactured. The indirect cost
may or may not be related to the manufacturing of the product but still occurs during the
manufacturing process. The name ‘indirect cost’ itself suggest that these cost are not fixed and
may vary from time to time (Andrade, Pessanha Filho, Espozel, Maia & Qassim, 1999).
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TRADITIONAL COSTING
The traditional method of costing refers to costs incurred by the production overhead
distributed to the products manufactured. In the traditional method the indirect costs incurred in
the factory is allocated to items produced in the factory based on the volume, for example the
number of units of production, the direct labour hours or the machine hours of production, etc.
(Huang, 2018). In our discussions, we will use machine hours. Traditional costing techniques
include standard costing, accountability, marginal costing, etc.
If only machine hours is used for allocating the overhead production to products produced, the
machine hours will only become the overhead production’s primary cause. Earlier this may have
been reasonable or, sufficient for the Company's external financial statement. However, in the
recent years the manufacturing overhead has been driven or caused by a number of other
factors.
COST- POOL
A cost pool is an individual cost grouping, usually by department or service center. Costs are
then allocated from the cost pool (Mastilak, 2011). The maintenance costs, for example, are
collected in a cost pool and then allocated to departments using their services.
A cost pool of activities is a collection of all costs related with the performance of a specific
business task, such as the production of a specific product (Bragg & Bragg, 2019). By pooling
or by assembling all the expenses or the costs accumulated in a given task, a precise and in-
depth evaluation of all the cost of the given task can be done in a easier way.
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