Production Cost
Production cost refers to the cost of labor, materials and overhead to manufacture goods, deliver services or complete construction projects. In accounting, the cost of goods sold (COGS) represents the production costs incurred to create the goods, while services rendered are reflected in labor and overhead expenses. Generally, production costs include direct labor, benefits, bonuses, piece rates, direct materials, supplies, overhead and any other costs related to transforming raw materials into a finished product.
Direct Labor
Direct labor is the cost associated with having employees who are manufacturing a product or performing service tasks for a company or customer. This cost is often related to the time and effort required to perform a job and does not include fringe benefits and bonuses associated with individual employees.
Benefits and Bonuses
Benefits and bonuses are benefits that nonprofit organizations and businesses give employees to attract and retain them. These benefits can include health care coverage, accident and death protection, paid holidays, paid vacations, overtime compensation, bonuses, stock options and more.
Piece Rates
Piece rates are payments made to employees based on the number of products they produce. This payment structure is used in working environment that require minimal supervision, such as those of a manufacturing facility.
Direct Materials
Direct materials are those materials used directly in the production process; they are inventoried on the balance sheet and charge to projects based on their purchase costs. Examples of direct materials used in the manufacturing process include wood, metal, textiles, paint and other materials.
Supplies
Supplies are indirect materials used during the production process and are inventoried on the balance sheet. Such supplies often include tools, office supplies, uniforms, cleaning supplies and other indirect materials used in the manufacturing process.
Overhead
Overhead costs are those fixed expenses required to operate a business and produce a product. Common examples of overhead costs include rent, utilities, insurance, equipment maintenance, administrative salaries, accounting fees and office supplies.
Other Costs
Other costs related to the production process include taxes, fees, licenses, shipping and handling costs, freight, custom fees and legal fees.
Conclusion
Production cost refers to the cost of labor, materials and overhead required to produce goods, deliver services or complete construction projects. Direct labor, benefits and bonuses, piece rates, direct materials, supplies and overhead are all important aspects of the production cost equation. Additionally, other associated costs such as taxes, fees, licenses, shipping and handling costs, freight, customs fees and legal fees must be taken into consideration.
