Calculating Cost of Production as a Sales Benchmark

The cost of production is one of the important elements that need to be calculated to later be used as a benchmark price sales. How to calculate the cost of production itself consists of several steps. The steps for calculating the cost of production will be explained more clearly in this article.

Understanding and Benefits of Cost of Production

The cost of production is all costs incurred by the company to produce goods until they can be sold within a certain period. Calculating the value of the cost of goods manufactured is important because it will be used to determine the selling price of goods so that the company can make a profit.

Apart from being a benchmark for selling prices, there are other benefits that you can get by calculating the value of the cost of production. Among them are as a production cost control tool, to monitor the realization production cost, as material for calculating cost of goods sold (HPP) , as calculation material profit and loss, and helps determine the cost of finished product and work-in-process inventory that is presented on the balance sheet.

How to Calculate Cost of Production

As stated above, calculating the cost of production consists of several steps, including calculating the raw materials used, then calculating the total cost of production. After getting the cost of goods manufactured, you can proceed to the calculation of the cost of goods sold (HPP), to determine the selling price of the goods.

Calculating Raw Materials Used

The first step to obtain the value of the cost of production is to calculate the total raw materials used for one period. This step is very important, especially if your business is a manufacturing business, where your business makes products from raw materials, raw materials, or semi-finished materials.

Not only that, the value of this calculation will also be useful for calculating the total cost of the product in the next step.

Here is the formula for calculating raw materials used in production:

Calculating Total Production Cost

The next step is to calculate the total cost of production. You can calculate the total cost of production by adding the value of raw materials used with the value of direct labor costs and costs overhead production. If formulated, it becomes as follows:

Calculating Cost of Production

After getting the total cost of production, here's how to calculate the cost of production:

Calculating Cost of Goods Sold (HPP)

If you have obtained the value of the cost of goods manufactured, then you can calculate the value of the cost of goods sold (HPP) in the following way:

Well, that's how to calculate the cost of production to help determine the benchmark for the selling price of goods. To simplify the calculation process, you can also use help accounting app or accountancy. Good luck!