How to calculate product costs and value work in progress
Product cost is an important metric that helps businesses optimize their operational efficiency. So how do you calculate product costs today? Let's look at the details in the article below so you can easily control your business's revenue and profit.
What is product cost?
Before learning how to calculate product costs, let's look at the concept of “what is product cost?”! Product cost is understood as the total of all expenses, including materialized labor and living labor incurred during production, to create a finished product.
What is product cost?
Types of product production costs
Product costs can be divided into several types according to criteria and costing methods as follows:
● Calculating product cost based on costs incurred: cost of sales and production cost.
● Calculating product cost based on timing and data source: planned cost and standard cost.
How to calculate product costs
Production costs can be calculated using many different methods. Let's explore the common methods for calculating product costs below.
How to calculate product costs
The simple method
This is a direct product costing method suited to simple manufacturers with few items, small volumes and short production cycles.
Calculating product costs with the simple method
Formula:
Total cost of products completed in the period
= Opening work-in-progress production cost + Production costs incurred in the period - Cost reductions - Closing work-in-progress production cost
Where there are few work-in-progress products, the cost per product is calculated with the formula:
Cost per product
= Total production cost of products / Number of products completed
Where the business has many or unstable work-in-progress products:
Cost per product = Z1 + Z2 +...+ Zn
The by-product value elimination method
This product costing method suits cases where the same production process produces both main products and by-products (by-products are not the costing object).
Total cost of main products completed in the period
= Opening WIP production cost of main products + Production costs incurred in the period - Estimated recoverable value of by-products - Closing WIP production cost of main products
The step costing method
The step method suits businesses whose production is carried out in many departments.
Cost of products completed in the period
= Product cost at stage 1 + Product cost at stage 2 + … + Product cost at stage n
The coefficient method
This production costing method is used by businesses that use the same materials and labor but obtain several different products at once, with costs pooled for the whole production process.
Unit cost of the base product
= Total production cost of all product types / Total number of base products
Unit cost of each product type
= Unit cost of the base product x Conversion coefficient of each product type
The coefficient method
The standard costing method
This product costing method applies to businesses with stable production processes that have built and manage cost standards.
The standard costing method
Methods for valuing work in progress
Work in progress can be valued using the following methods:
Valuation based on main (direct) material costs
Under this method, closing work in progress is calculated with the following formula:
Valuation based on main (direct) material costs
The equivalent units method
With this method, closing work in progress bears all the period's production costs according to its degree of completion.
Case 1: Costs incurred once at the start of production, such as direct/main materials.
The equivalent units method
Case 2: Costs incurred gradually during production
Costs incurred gradually during production
Valuation based on standard (planned) costs
This product costing method is based on the quantity of work in progress and the standard production cost of a product at each stage to calculate the cost of closing work in progress.
Solving the costing problem with software
Complex costing methods require accounting staff's expertise. To ensure your business operations run as well as possible, Sbiz.vn is the perfect solution for you. Sbiz.vn helps solve every costing problem with very simple software.
Some Sbiz solutions:
➤ Purchase management software
➤ Materials warehouse management software
Sbiz.vn provides an enterprise resource planning system that links all of a business's activities, enabling planning, statistics and control and supporting in-depth reports.
If you are worried about costing or operational problems in your business, sbiz.vn is a choice you can't miss. Register for advice now so sbiz.vn can help your business succeed!