Product Cost Calculation: Procurement to Manufacturing
**Costs Associated with the Product**
The product cost is obtained by adding the costs generated in the different phases of the business. The total cost of the finished product consists of:
Procurement Cost
Includes the cost of raw materials and other materials or elements that are incorporated into the product, and all the costs of supply such as packaging, transportation, insurance, etc. It should be added the costs associated with order management, administration, telephone, fax, etc., and follow the order until receipt of shipment.
Storage Cost
These are the costs that result from maintaining and conserving stocks in the warehouse.
Manufacturing Cost
These are those that occur at different levels of the manufacturing cycle to transform raw materials into finished products ready for sale.
The purchase price is the one that the supplier applies on the invoice, i.e., the amount of items net of discounts and excluding VAT.
The acquisition cost is the purchase price stated in the invoice but includes all additional costs until the goods arrive at the warehouse of the buyer, such as non-returnable packaging, transportation, loading and unloading costs, customs duties, taxes, etc.
The manufacturing cost is the expenditure that the company supports to develop or transform materials into finished products suitable for sale. Manufacturing costs can also be direct or indirect.
Direct Costs
These are part of the production process, and a higher volume of manufacturing means a higher cost. Among them are the following:
- Cost of materials: raw materials, auxiliary materials.
- Cost of packaging: returnable and non-returnable.
- Cost of direct labor: wages and social charges for personnel working at the stage of manufacturing (insurance).
- Cost of external services: This is when an intermediate stage takes place outside of the production by other companies and specialists.
- Fuel or energy costs: consumed during the production process, as well as the cost of tools, maintenance, and conservation of raw materials, work in progress, and completed products. The amount of depreciation or rental of premises, maintenance costs of products (heating and cooling), and insurance premiums are included here.
Indirect Costs
All those that cannot be attributed to a product, section, or department. Among them we can mention:
- Expenditures for local offices and general services.
- General supplies (water, telephone, electricity).
- Office supplies.
- Salaries of management and cleanup, etc.
**Calculation of Acquisition Cost**
The acquisition cost is equal to the gross amount of every item minus discounts by the supplier plus all expenses paid by the buyer. The gross amount is the result of multiplying the quantities purchased of each item by its corresponding unit price.
The rebates are rebates or discounts that apply to the amount of merchandise, including: Discount shopping, discount for volume purchases or rappel, cash discount, and unit bonus (free units are X units per X units purchased).
The Purchase or Acquisition Costs
The expense of the buyer leads to an increase in the amount of the purchase and poses a problem in calculating the unit cost. When the same item is purchased or transporting goods of various types, either by getting larger discounts or making better use of transport, the problem is:
How do you calculate the costs relating to each item?
The cost-sharing or charging on each product can be made according to the units, weight, volume, price, difficulty in handling, etc.
Packaging: The amount of these costs is divided into the units. It is applied to each product container and packaging for X product. When units are returnable, packaging is not included in the cost because the customer returns them to the supplier and the supplier pays the amount.
Transportation: Transportation expenses are divided based on weight or volume depending on the characteristics of the goods and conditions of the company performing the service. The total is divided between the kg or tons transported to apply the amount corresponding to each item depending on weight.
Loading and unloading: These expenses are usually shared by weight or degree of difficulty in handling them.
Insurance and duties: Apply as the net or the value of the goods, taking into account also other characteristics of the product. Not all items pay the same insurance premium to cover risks, such as fresh meat, jewelry, glass plates, etc. With the tariffs, something similar happens; the tobacco import taxes or alcoholic beverages are different, i.e., they have a special tax.