Cost is one of the most important performance indicators of any company. It characterizes the competitiveness of the organization’s products, and is also a set of costs incurred in the production process. To perform the correct analysis, prepare the financial statements of the organization, you need to know what expense items are included in the cost of production. They will be discussed in detail below.
General definition
What costs are included in the cost of production? To answer this question, you need to consider the features of production. In order to manufacture this or that product, the company spends labor, fixed assets, labor, etc. During this process, the cost of funds and labor is transferred to the total price of goods and services.
Costs are the assessment of production resources, which is expressed in cash or in kind. In the first case, they are called costs. In addition to costs, the company in the course of its core business incurs expenses during its organization (advertising campaigns, market research, etc.). They are expressed in cash and are costs to sell.
Costs are the costs that the company attracts for production resources in the course of carrying out production or trading activities.
In addition to production costs, taxes and fees are included in the cost of production. This also includes contributions to trust or extrabudgetary funds. Therefore, the costs consist not only of the costs that arise during implementation. They also include indirect taxes.
It is worth noting that there is a certain difference between the concepts of “costs”, “costs” and “costs”, although in some cases they are used as synonyms. So, costs are the costs that arose in a certain period. These are specific payments that can be covered both at the expense of the organization’s profit and income, earmarked funds and funds.
It is from costs that such a concept as the cost of production is formed. This is an estimate of the cost of resources, fuel, energy, materials, intangible assets, etc., that the company attracts during the manufacture and sale of its products.
Classification according to the principle of economic uniformity of costs
Studying what costs are included in the cost of production, it is worth noting that any organization carries a variety of costs. They differ in economic purpose, place of origin, as well as in the role performed in the production process. In addition, they may depend on the volume of production.
The structure of the production cost of production includes the costs of all production units, services and sections. The company calculates the shop floor, production and full cost. For this, costing items are determined. But in the financial statements, an estimate is made in which the costs are grouped by economically homogeneous elements presented in the table below.
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1. |
Depreciation of fixed assets and intangible assets |
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2. |
Contributions to social funds |
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3. |
Material costs |
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4. |
Salary |
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5. |
Other |
To perform the correct calculation of value, you need to understand what cost items are included in a particular group of expenses. The composition of the production cost of production includes necessarily material costs. These include the following expenses:
- gasoline, gas, electricity, etc.;
- material costs;
- components (purchased);
- blanks;
- work or services related to the production of goods and performed by a third-party company;
- energy.
Material costs
Raw materials are the purchased components from which the finished products of the organization are produced. This is its foundation, the necessary components. The cost of the presented item of expenses includes the costs, without which it would be impossible to organize the normal course of the production cycle, packaging. Also, such components can be spent on other household or industrial needs.
The cost of production includes general business expenses that the company incurs during the purchase of spare parts for repairs, deductions covering the depreciation of tools, instruments and other means of labor, low-value items.
The structure of the presented costs includes payment for the use of water resources from common networks.
This category includes purchased components and parts, which will subsequently be subjected to further installation or processing, revision. If the work is carried out by a third-party organization, payment for its services also applies to the total cost of the product. These can be separate operations for processing raw materials, repair or transport (internal or external) services.
Material costs include research, testing and design work, actions associated with the development and development of new technological processes.
The cost item “Fuel” includes the cost of acquiring it for technological purposes, as well as the generation of other types of energy. With the help of gasoline, gas, etc., they heat buildings and carry out transport work.
The article “Energy” includes the costs of acquiring electricity, compressed air, thermal energy, etc. It is spent on various production needs.
Labor costs, social funds, depreciation
The cost of finished goods includes the costs of paying employees. This includes the amount of wages that are accrued on the basis of piecework tariffs, rates and salaries of officials and others. They are set depending on the results of labor.
Also in this article include compensation and incentive, incentive payments. This may include payments made by the organization in connection with price increases, as well as revaluation. Bonus systems for ordinary employees and management personnel are also reflected in the presented item of expenses. Other forms of remuneration adopted at the factory also belong to this category of costs.
In addition to remuneration, deductions that relate to the total cost include the costs of social funds. In some cases, an entity is required to make such payments. The legislation establishes appropriate tariffs. The company also pays for health insurance for certain categories of workers. This is also stipulated by law.
Cost of production includes depreciation expenses. Gradually, the entire amount of PF and intangible assets is transferred to the total cost of the organization’s products. For this, the book value and depreciation rate are applied. It is calculated in accordance with all the rules established by the Ministry of Finance. Deductions to cover material or moral depreciation can be calculated using the accelerated method. In accordance with the legislation, indexation of deductions is carried out.
After the expiration of the service life of the asset or intangible assets object, deductions cease. This is true if they fully transferred their value.
other expenses
The cost of production includes costs that do not apply to the items listed above. So, the category “Other” includes emergency taxes paid by enterprises to eliminate the consequences of the Chernobyl explosion, deductions to the innovation fund, and land tax. They also pay environmental taxes, various percentages. For short-term bank loans (except for deferred and deferred payments) and long-term loans to increase the amount of funds in circulation, they also make deductions. They are transferred to the total cost of production. This also includes payment on promissory notes in the current period, as well as on short-term loans to individuals or legal entities.
If some services or goods were purchased from third parties on credit, and other services related to the company’s work were also paid for, the amount of such costs is also indicated in this article. In addition, the following items are included in the total price.
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1. |
Lease payment of some objects of public interest, leasing |
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2. |
Certification of finished products |
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3. |
Travel expenses |
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4. |
Payment to other organizations for the provision of security, fire and other services, including the construction of relevant facilities |
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5. |
Deductions for centers providing information, computing, communication services |
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6. |
Third-party retraining or training fees |
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7. |
Advisory, auditing, informational and other services |
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eight. |
Compensation for depreciation of personal vehicles, tools, equipment provided by agreement, used for the needs of the enterprise |
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nine. |
Contributions to reserve and repair funds |
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ten. |
Other specific costs attributable to the cost of production |
Costs as a result
The cost of production includes work performed or services rendered that can be divided into two large groups. They are called direct and indirect costs. In the first case, costs are immediately attributable to the cost of a particular product or service. This category includes purchased material resources, billets, parts, gasoline, gas and electricity. They are directed to the technological needs of the enterprise.
Direct expenses also include accrued wages to employees of the organization, contributions to social funds. This category includes health insurance premiums for certain categories of workers.
If a company manufactures several types of products, then some costs cannot be immediately attributed to the total cost. Therefore, they are called indirect. These costs include the costs of the administrative and managerial categories of employees. This is also the salary of managers at various levels. Indirect costs include the heating of premises, the creation of artificial lighting, sewerage, equipment wear, and repairs. It can also be a salary for employees not related to the production.
By function of activity
Included in the cost of production, work, services are expenses that are classified based on the functional activities of the company. On this basis, there are 4 categories of costs:
- production;
- supply and procurement;
- commercial, sales;
- managerial.
This separation allows you to carry out planning and cost accounting for each area of activity. This allows you to carry out the correct on-farm calculation.
The role of involvement in the economic process is divided between overhead and basic expenses. The first category includes costs that are generated during the organization, management and maintenance of production. They include general and general production expenses. The magnitude of this category of costs depends on the management structure of workshops, departments and enterprises.
The main costs associated with the process. This category includes raw materials, materials, energy, fuel. The cost of production includes costs for technological purposes, for the payment of salaries to employees employed in the process of manufacturing finished products.
Costing Articles
The cost of production includes the costs of costing items. This allows you to calculate the costs that fall on the unit of manufactured products. For this, a special statement is used, which is called costing. It reflects data on planned and real costs for the entire output during the study period. This approach is called finished product pricing. This allows you to determine the costs for each type of product.
This includes both material costs and the costs of servicing, creating and managing a certain type of product. Each organization develops its own range of costing articles. This takes into account the specific needs of the company. There are certain industry guidelines for this. The most common list of costing articles is shown in the table below.
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1. |
Raw materials. |
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2. |
Semi-finished products produced at the enterprise. |
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3. |
Returnable production waste (subtracted from the total amount). |
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4. |
Fuel, energy used in the technological cycle. |
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5. |
Supporting materials. |
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6. |
The cost of paying salaries to employees engaged in the production of products. |
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7. |
Social payments. |
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eight. |
The cost of preparation, development of production. |
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nine. |
Operation of production units, equipment. |
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ten. |
Shop expenses. |
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eleven. |
General business expenses. |
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12. |
Losses due to marriage. |
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13. |
Other expenses incurred in production. |
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fourteen. |
The cost of business. |
Shop value is determined by adding the first ten articles. To calculate the production price of the organization’s products, add the first 13 articles of the calculation. Summing up all the listed item lines, you can get the full value of the goods.
Cost to volume ratio
The cost of production includes fixed and variable costs. They are necessarily calculated by the company to determine the optimal volume of production.
Fixed costs are not dependent on an increase or decrease in the number of manufactured products. Their company carries, even if it does not produce anything.
Variable costs increase in proportion to the increase in output. For some companies, the indicator changes in accordance with the level of business activity. This, for example, may be the wages of workers engaged in primary production, raw materials, etc. Variable costs are calculated per unit of output. This is a constant.
If the company has fixed and variable costs, with an increase in production, the total cost of a unit of production will decrease.
