Product cost calculation, is not just collecting the price of the raw materials used. To find the real cost of a product, you need to calculate direct material, direct labor, general production expense, wastage, subcontracting, energy and depreciation expenses together.
The most common mistake made by shoe, textile, leather, furniture, metal and packaging manufacturers; is to limit the cost to the amount of material in the bill of materials. However, if the losses incurred during production, labor time, electricity consumption, subcontracting and machinery expenses are not taken into account, the business may incur a loss even if the sales price seems profitable.
Product Cost Calculation Formula
Unit product cost
(Direct material + direct labor + general production expense + waste + subcontracting + energy + depreciation) ÷ number of intact products
In the calculation, it is not the quantity planned to be produced, but the quantity that has passed quality control and is in a salable condition. number of solid products should be used. Materials and production costs lost due to waste are added to the unit cost of the remaining intact products.
Direct Raw Materials and Materials
It is the consumption amount of leather, fabric, metal, wood, sole, zipper, paint, packaging and similar materials directly contained in the product.
Direct Labor
It is the wage and benefit cost of the working time spent directly on the product in cutting, sewing, assembly, packaging or at the machine.
General Production Costs
It is the appropriate distribution share of rent, maintenance, quality control, production management, auxiliary materials and factory expenses that cannot be directly attributed to a single product.
Waste, Subcontracting, Energy and Depreciation
Unusable materials, outsourced processes, electricity consumed in production and periodic depreciation of machines are added as separate cost items.
Sample Product Cost Calculation
Let's assume that 1,000 products were planned in a production batch, and 950 solid products were obtained at the end of quality control. Let the party expenses be as follows:
| Cost item | Amount |
|---|---|
| Direct raw material and components | 180,000 TL |
| direct labor | 70,000 TL |
| General production expenses | 43,000 TL |
| Waste cost | 12,000 TL |
| Subcontracting operations | 20,000 TL |
| Energy | 15,000 TL |
| depreciation | 10,000 TRY |
| Total party cost | 350,000 TL |
Unit cost = 350,000 TL ÷ 950 intact products
368.42 TL
If you divide the total cost by the planned 1,000 units, you will think that the unit cost is 350 TL. Ignoring wastage and the number of intact products, per product 18.42 TL missing cost causes you to calculate.
Difference Between Standard Cost and Actual Cost
| Comparison | standard cost | Actual cost |
|---|---|---|
| Data source | bill of materials, planned consumption and estimated prices | Actual material consumption, working time and invoices |
| When to use? | Offer, budget and pre‑production price determination | During production and after order completion |
| Result shown | Planned cost of the product | How much the product actually costs the business |
| Management purpose | Create target cost and selling price | Seeing variance, waste and true profitability |
A healthy approach is not to see the two accounts as alternatives to each other but to use them together. Standard cost sets the target before production; actual cost shows the difference between the target and the result at the end of production. KG Palaimon production ERP solution, combines product tree, work order, material consumption, labor, waste and energy data on the same order.
A Real Example of a Manufacturer
When leather consumption, bill of materials, wastage and stock amount are not monitored correctly, the cost calculation remains tied to people's memories. Esinti Deri in stock and cost control success story You can examine how purchasing as needed and order-based cost tracking reduces the stock load.
Mistakes Made While Calculating Product Cost
- Not to evaluate waste and faulty production separately from solid products.
- Adding labor cost with an estimated percentage, not using actual labor time.
- Not apportioning energy, maintenance, rent and depreciation expenses according to the distribution key appropriate to the products.
- Not taking into account the current amounts for subcontracting, transportation and materials purchased in foreign currency.
- Dividing the total cost by the number of planned production instead of the number of intact products.
To see the relationship of unit cost with software records in the production cost calculation guide You can also examine the breakdown of materials, labor and general expenses.
See Which Product You Really Profit From
Reduce the risk of losing sales by tracking material, labor, wastage and general expenses on the basis of product, order and production batch.