Question

how do you determine production cost in corporate finance

Answer 1

Production cost typically refers to cost associated with the total cost associated with production of a unit good by the entity.

The costs are basically divided into two heads:

1. Fixed cost - The costs that are not dependent on the volume of goods produced and includes overhead costs such as premises rent, taxes on property, equipment costs, depreciation. Direct labor cost when it is independent of the number of hours or volume produced, also comes under fixed cost.

2. Variable cost - The costs that are dependent on the volume of goods produced and includes the raw material costs, commission, piece wise wages, volume based bonuses and time/volume dependent direct labor cost.

Costs are identified and proper cost allocation is done on different heads made after cost pooling which is nothing but grouping of individual costs and the entity uses a single cost allocation basis to destined cost objects such as labor hours, machine hours, etc. as a relevant multiplier.

With this, we arrive at the final cost of production.

Some other costing methods are activity based costing and volume based costing.