However, far beyond accounting, it is also necessary to understand the economic implications involved in this process. Among them, one of the main ones is the analysis of the marginal cost.
Widely studied by microeconomics, marginal cost is a mathematical relationship that aims to find an optimal point, where the cost of producing one more unit is equal to the average total cost of the entire production. In this way, the calculation shows in which quantity the producer is more efficient
An issue that generates some confusion in the calculation of manufacturing costs is the cost of fractioned raw material.
For example, in a recipe, you use only 150 grams of condensed milk, but a can contains 395 grams. What is the cost of this raw material?
To solve this equation you need a rule of 3:
(Packaging cost ÷ Pack quantity) x Quantity used
Cost of a can = BRL 5
Can quantity = 395 g
Quantity used = 150 g
( R$ 5 ÷ 395) x 150 = R$ 1,90
The cost of 150 grams of condensed milk is R$1.90.
To perform this equation, quantities must always be in the same measurement factor, eg gram or kilo.
One resource used to eliminate this complexity is to use generic raw materials. I’ll talk more about them in the next topic.
generic raw material
The generic raw material is a product created exclusively to compose product recipes.
They are widely used in management systems that control costs and prescriptions.
The cost and stock of generic raw materials are fed by entry releases and product relocations.
There are certain features of this type of product. Are they:
They don’t have a brand. This feature is necessary because the generic product can receive stock from two different brands, updating its average cost.
Its factor is always weight and in the same unit of measure, usually kilo and liter.
The main advantage of this methodology is that it is easy to calculate and constantly update the cost of the manufactured product in the event of an exchange of raw material brands.
Which Of The Following Costs Is Not A Cost Of Quality?
As we know, costs are all expenses specifically related to the production of the merchandise or provision of the service. They are classified into direct and indirect costs and fixed and variable costs. Fixed and variable costs, as their names imply, refer to the change they can undergo.
When a cost is frequent and occurs every month, it is called a fixed cost. When it exists sporadically, oscillating due to the quantity sold, we are talking about the variable cost…
Direct and indirect costs, in turn, are related to the ease or difficulty in assigning value. If defining the cost of a particular product is easier, it is considered a direct cost. However, if there is greater difficulty in assigning this value, it is considered an indirect cost.
What Is A Fixed Cost?
Fixed cost is that expense that exists every month, regardless of whether the number of sales increases or not. This cost is also often called structure cost, as it covers expenses related to the enterprise’s production capacity.
It is very important to remember here that the fixed cost does not mean that the value is fixed, that is, it does not mean that it is always the same value. It means that it takes place every month and it does not depend on the number of products sold or services provided.
The fixed costs of a company are, for example, the amount paid for renting a space or a machine and the salaries paid to employees of the operation, as long as they are not commissioned.
Imagine the case of a dog food factory. In one month, it can produce 15 tons of feed, while the following month the production can reach 25 tons or drop to 10. In either case, the fixed costs, such as periodic maintenance, and rent remain unchanged, as they are independent. routine production or sales.
What Is A Variable Cost?
Unlike fixed costs, variable costs are those that undergo short-term changes, usually related to some variable in production and sales. As an example, we can highlight raw materials, production inputs, and taxes.
In other words, the more the company sells, the greater the variable cost, as there is a direct relationship between the two factors. In the case of the feed factory, the costs dispensed with the purchase of raw materials, such as meat and corn, will vary if there is a drop or increase in production and sales.
This is also a cost that may not occur in a few months if there are no sales.
When we talk about these costs, it seems much easier to calculate those that are fixed, doesn’t it? After all, since they don’t vary, just add them up and get the total. But how to calculate the variable cost?
This calculation differs according to the characteristics of the company. If salespeople are commissioned and employees are paid for hours worked, these factors need to be factored into the bill, but let’s give an example with a simpler calculation.
In the case of the feed mill, a method to calculate the variable costs could be the sum of all these costs according to a certain period, such as a month, for example, and the division of the total by the number of kilos of feed produced in that same period. time course.
That is, considering that the sum of expenses with packaging, production inputs, raw materials, and employees’ salaries resulted in BRL 100,000.00 and the production volume reached 70,000 kilos, the variable cost of each kilo of feed would be BRL 1.42 (100,000 / 70,000).
It’s not that complicated, is it? But so that you don’t have any doubts about how to calculate and project this variable cost, we encourage you to watch the webinar How to Perform Your Variable Cost Projection Using Treasury! In it, we show how to project revenues, deductions, and variable costs, having access to important indicators such as Gross Revenue Projection, Net Revenue, and Contribution Margin. To access, just click on the image below and download it for free.
What Is A Direct Cost?
Another classification of costs involves those that are direct and indirect. The direct cost is one for which it is easier to assign a value, that is, what is measurable without difficulties, without apportionment and that is directly related to the final product.
Examples of direct costs are raw materials and direct labor. To calculate the unitary direct cost, it is recommended that the company has a system of requisitions related to the consumption of materials and a system of notes that allows relating the time and work performed by each employee.
Thus, expenses with the purchase of raw materials are added to expenses with direct labor and the value is divided by the number of products produced in a given period.
What Is The Indirect Cost?
Unlike direct costs, indirect costs are those in which it is difficult to assign a value to each unit produced. In the case of the feed industry, for example, it would be almost impossible to determine the exact cost of water or electricity to produce each kilo of the product. In other words, in the case of indirect costs, the attribution of value is not as simple as in the case of direct costs.
To calculate the indirect costs, the apportionment criterion is used, in which an approximate value is defined so that the cost of each product unit can be calculated. In the case of calculating water at the feed mill, for example, it is when we take the total amount spent in a month and divide it proportionally between each kilo of feed.
What Are The Costing Methods?
Now that you know what and how costs are classified, you need to check how to calculate them in your company, that is, which costing method best suits your business.
The variable costing method is one of the most used in industry and commerce. In this model, the most important thing is to evaluate the amount of raw material used in the production of the items sold using only direct and variable costs.
Thus, a simple calculation is made of the amount of raw material needed to produce each piece and the price of this raw material, to define the cost required to produce each unit.
The absorption costing method is a little more complicated, as it uses all the costs of the manufacturing area, whether direct or indirect, whether fixed or variable. Another difference is that this method only takes into account the products sold, that is, those that are being prepared or that have not yet been sold are not accounted for in the absorption cost.
As with any process that involves several numbers and calculations, having a spreadsheet to assist in this activity is important, don’t you think? So, click on the image below and download our free Absorption Costing vs Variable Costing worksheet template. With it, you will be able to apply both costing methods in practice in your company!
Step By Step On How To Assemble Product Costs
Now that you’ve learned the difference between each, let’s get down to business.
If you have an industry or a trade, there are two nomenclatures you need to know:
CMV (Cost of Goods Sold): CMV is mostly used in commerce, but it can include any activity that is not necessarily in this sector, as long as the company buys something to resell, such as products that a beauty salon sells to customers.
CPV (Cost of Product Sold): first of all, one point needs to be made clear: product and merchandise are not synonymous words in the accounting and fiscal universe. The first term refers to the good that is produced by the company itself. The second represents materials that are purchased from third parties for resale.
That is why, then, CPV is directly linked to industrial processes. Therefore, this indicator uses as variables, in addition to stock balances, general manufacturing expenses, raw material, and labor costs.
For an industry to identify its Cost of Goods Sold, it is necessary to create a Technical Data Sheet per product. This can be a lot of work, but it has very significant results.
Marginal Cost Definition Economics
In economics, marginal cost is the change in total cost when the total output of goods or services is increased or decreased by one unit.
According to the Law of Decreasing Marginal Income, the tendency is that, from a point onwards, the marginal costs are increasing with the production of more units, and decreasing as soon as production becomes smaller.
This happens because, at a certain point in the production arrangement, to get more units it is necessary to add more and more inputs and production factors in the process.
energy value: Only products that do not register more than 40 kcal (170 kJ) / 100gr in the case of solids or more than 20 kcal (80 kJ) / 100 ml in the case of liquids can be identified.
If the energy value is reduced by at least 30%, with an indication of the characteristics that cause the reduction of the total energy value of the food.
As we’ve already talked about here, taking care of costs is essential for the company’s financial health. Wrong practices involving costs can result in losses, as occurs with poor pricing and poor planning of the business budget.
But in addition to knowing what the costs are and how they are classified, it is important that you have good Planning and Controlling tools, such as Treasury, which offers the best resources to help you manage your business!
We hope you enjoyed this article. Do you have any questions or do you want to share an experience? Feel free. We are here to listen to you and exchange ideas.
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