What is the product price? 6 ways to calculate specific product costs
What is the product price ? How to calculate accurate prices and optimize profits as well as increase competitive advantage for businesses? The above issues are sure to be of interest to many businesses. In the article below, 1C Vietnam will help accountants partly grasp the concepts as well as understand the method of calculating product costs . Find out now!
1. What is the product price?
Product cost is the entire cost of living labor and material labor related to the volume of products, services and work completed in the period. Product price is the accumulation of costs, including:
- Direct materials costs: Includes the essential parts and materials needed to create the final product.
- Direct labor costs: Wages of workers involved in manufacturing a product.
- General costs: Production costs include depreciation of equipment and machinery, salaries of management staff, factory and workshop rental costs,...
2. 6 ways to calculate product cost accurately with illustrative examples
Depending on the characteristics of each industry as well as company size, businesses can use different product cost calculation methods. Below are some popular calculation formulas for administrators to refer to.
2.1 Direct cost calculation method (simple)
The simple product cost calculation method is suitable for businesses with simple production processes, short cycles, large volume and small number of items. As follows:
- The enterprise uses technically closed production technology
- Enterprises with short production cycles: water plants, power plants, wood/coal/ore mining enterprises,...
Formula to calculate unit product cost
Total product cost = Cost of production in progress at the beginning of the period + Cost of production during the period – Cost of production in progress at the end of the period |
Example of product cost calculation: In September 2023, enterprise A produced 5,000 products and 1,290 products were unfinished. Below is a product cost calculation table with a simple method, given data and statistical costs for the month.
2.2 Step-by-step cost calculation method
Businesses using the step costing method often have complex production processes, combining many departments within the company as well as going through many technological stages. Objects that need to be gathered to calculate production costs include product details, production parts and technological stages.
This method is suitable for businesses with high internal accounting needs between stages or selling semi-finished products outside. However, this method requires businesses to determine the price of finished products in each stage before determining the cost of the final product.
Formula to calculate unit product cost:
Cost of products completed in the period = Product cost of phase 1 + Product cost of phase 2+…+ Product cost of phase n |
For example: A business A produces products in 2 stages. With costs listed as follows:
Expense item | State 1 | Phase 2 |
Cost of raw materials | 185,000 | - |
NCTT costs | 24,400 | 37,800 |
Production costs | 47,200 | 39,760 |
total | 256,600 | 77,560 |
Production results for the month:
Phase 1: Complete 150 half-finished products, remaining 50 unfinished products with a completion level of 60%.
Phase 2: Received 150 half-finished products from phase 1. At the end of the period, 130 products were completed, leaving 20 products 50% complete.
Below are the steps to calculate product cost according to the step-by-step costing method
Phase 1: Expenses in progress at the end of the period
Cost of raw materials | = | 15,000 + 185,000 150 + 50 | x 50 | = | 50,000 |
NCTT costs | = | 8,000 + 24,400 150 + 50x60% | x 50 x 60% | = | 5,400 |
Production costs | = | 6,800 + 47,200 150 + 50 x 60% | x 50 x 60% | = | 9,000 |
From there, we can calculate the half-finished product cost during the period: 150 NTP(A)
Unit: thousand dong
Items Expense | Value in progress at the beginning of the period | Expenses incurred during the period | Value in progress at the end of the period | Total cost NTP | Cost of NTP unit |
Cost of raw materials | 15,000 | 185,000 | 50,000 | 150,000 | 1000 |
NCTT costs | 8,000 | 24,400 | 5,400 | 27,000 | 180 |
Production costs | 6,800 | 47,200 | 9,000 | 45,000 | 300 |
total | 29,800 | 256,600 | 64,400 | 222,000 | 1,480 |
Phase 2: Expenses in progress at the end of the period
Cost of raw materials | = | 150,000 | x | 20 | + | 0 + 0 | x | 20 | = | 20,000 |
130 + 20 | 130 + 20 |
NCTT costs | = | 27,000 | x | 20 | + | 0 + 37,800 | x | ten | = | 6,300 |
130 + 20 | 130 + 20 x 50% |
Production costs | = | 45,000 | x | 20 | + | 0 + 39,760 | x | ten | = | 8,840 |
130 + 20 | 130 + 20 x 50% |
Finished product cost calculation table for phase 2, quantity: 130 NTP(A)
Unit: thousand dong
Items Expense | Price of NTP (Phase 1) | Value in progress at the beginning of the period | Expenses incurred during the period | Value in progress at the end of the period | Total cost NTP | Cost of NTP unit |
Cost of raw materials | 150,000 | - | 0 | 20,000 | 130,000 | 1000 |
NCTT costs | 27,000 | - | 37,800 | 6,300 | 58,500 | 450 |
Production costs | 45,000 | - | 39,760 | 8,840 | 75,920 | 584 |
total | 222,000 | - | 77,560 | 35,140 | 264,420 | 2,034 |
Calculation table of finished product prices at the end of the period: 130 NTP(A)
Unit: thousand dong
Items Expense | Price of NTP (Phase 1) | Value in progress at the beginning of the period | Expenses incurred during the period | Value in progress at the end of the period | Total cost NTP | Cost of NTP unit |
Cost of raw materials | 150,000 | - | 0 | 20,000 | 130,000 | 1000 |
NCTT costs | 27,000 | - | 37,800 | 6,300 | 58,500 | 450 |
Production costs | 45,000 | - | 39,760 | 8,840 | 75,920 | 584 |
total | 222,000 | - | 77,560 | 35,140 | 264,420 | 2,034 |
2.3 Proportional cost calculation method
The method of calculating product cost according to the ratio is suitable for businesses that produce products that use the same type of raw materials but have different qualities and specifications and cannot use coefficients to convert products. This. Specifically, some businesses such as textiles, shoe manufacturing, plumbing,...
To apply the proportional costing method in practice, businesses can apply the formula below:
Actual cost for each product specification = Total allocation criteria x Overall cost ratio for the product |
In which: Total allocation criteria is the total standard cost or total planned cost that has been determined before starting the production process.
2.4 Coefficient cost calculation method
The method of calculating product cost by coefficient is suitable for businesses that use the same number of workers and raw materials to obtain many types of products at the same time. In this method, costs are not separated for each type but are concentrated throughout the entire product production process.
Fields that often use coefficient product cost calculation include: Chemicals, garments, manufacturing, livestock, electromechanical, mechanical, etc.
Formula to calculate unit product cost:
Product price = Total cost of all product types / Total number of original products |
In there:
- Number of standard products = Number of products of each type × Conversion coefficient of each type.
(Conversion coefficient needs to be specified separately for each different product type within a product type. The conventional standard is coefficient 1).
- Total product manufacturing cost = Number of standard products × Standard product unit cost
Example of product cost by coefficient: At the Delicious Cake enterprise, which produces all kinds of cakes in the same production technology process, 2 products A1 and A2 are obtained in August 2023 with the following data. :
Unit: thousand dong
Unfinished products at the beginning of the month | Expenses incurred during the month | Unfinished products at the beginning of the month | |
Cost of raw materials | 50,000 | 450,000 | 20,000 |
NCTT costs | 10,000 | 590,000 | 6,000 |
Production costs | 15,000 | 80,000 | 5,000 |
total | 75,000 | 1,120,000 | 31,000 |
Final results: 120 A1 products and 150 A2 products were warehoused.
Product cost coefficients A1 and A2 are 1 respectively; 1,2.
From there, we can create a formula to calculate product cost as follows:
- Qh = Qi x hi = 120 x 1 + 150 x 1.2 = 300
- HA1 = 0.4
- HA2 = 0.6
Product cost calculation table A1 quantity: 120; HA1 = 0.4.
Unit: Thousand dong
DDDK value | Expenses arise during the period | DDCK value | Total overall cost | Total cost of product A1 | Unit cost of product A1 | |
Cost of raw materials | 50,000 | 450,000 | 20,000 | 48,000 | 192,000 | 1,600 |
NCTT costs | 10,000 | 590,000 | 6,000 | 594,000 | 237,600 | 1,980 |
Production costs | 15,000 | 80,000 | 5,000 | 90,000 | 36,000 | 300 |
total | 75,000 | 1,120,000 | 31,000 | 1,164,000 | 465,600 | 3,880 |
Product cost calculation sheet A2 quantity: 150; HA2 = 0.6.
Unit: Thousand dong
DDDK value | Expenses arise during the period | DDCK value | Total overall cost | Total price of product A2 | Unit cost of product A2 | |
Cost of raw materials | 50,000 | 450,000 | 20,000 | 48,000 | 288,000 | 1,920 |
NCTT costs | 10,000 | 590,000 | 6,000 | 594,000 | 356,400 | 2,376 |
Production costs | 15,000 | 80,000 | 5,000 | 90,000 | 54,000 | 360 |
total | 75,000 | 1,120,000 | 31,000 | 1,164,000 | 698,400 | 4,656 |
2.5 Method of calculating cost according to orders
The method of calculating product costs based on orders is often applied in conditions where companies produce in bulk or single units according to requests. The characteristic of this method is that the price will be determined for each order. Therefore, cost calculation will be done in detail for each order.
Formula to calculate unit product cost:
Cost of each order = Direct material cost + Direct labor cost + Manufacturing overhead costs incurred from the beginning to the end of the order. |
For example: In August 2022, the enterprise produces 2 orders A and B. The categories for fees and results are recorded as follows:
List of costs | Order A | Order B |
Renewable energy costs | 30,000,000 | 40,000,000 |
NCTT costs | 10,000,000 | 15,000,000 |
General production costs | 28,000,000 | |
Final results at the end of the term | 100% completed | Unfinished |
To calculate product costs for these 2 orders, businesses need to perform the following steps:
- Overhead costs allocated to the production of order A = (28,000,000 / 70,000,000) x 30,000,000 = 12,000,000
- Overhead costs allocated to the production of order B = (28,000,000 / 70,000,000) x 40,000,000 = 16,000,000
- Total cost of order A = 30,000,000 + 10,000,000 + 12,000,000 = 52,000,000
- Unit cost of product order A = 52,000,000 / 100 products = 520,000 / product
- Value of unfinished products for order B = 40,000,000 + 15,000,000 + 16,000,000 = 71,000,000
2.6 Cost calculation method excluding by-products
The method of calculating product costs based on secondary exclusion will be applied to businesses with the same production process but the output will include main products and by-products. Some applicable fields include businesses processing alcohol, sugar, instant noodles,...
To calculate the product cost excluding products, businesses need to implement the following two formulas:
1 - Determine the cost and proportion of the cost of producing by-products compared to the main product
Proportion of by-product production costs = Non-product production costs / Total actual production costs |
2 - Calculate the cost of main products
Total cost of main products = Value of main unfinished products at the beginning of the period + Total costs incurred during the period - Value of recovered by-products - Value of main unfinished products at the end of the period |
Example: Table recording costs and results in September 2022 of a sugar manufacturing enterprise
List of costs | Order A |
Direct materials | 160,000 |
Direct labor | 30,000 |
General production costs | 20,000 |
DDDK product value | 20,000 |
Value of DDCK products | 30,000 |
Main products are warehoused at the end of the period | 400 tons of sugar |
Byproduct | 10 tons of molasses (200,000 VND/ton) |
From the above data, we can calculate the cost as follows:
- Cost of producing by-products = 10 x 200 = 2,000
- Actual production cost = 20,000 + (160,000 + 30,000 + 20,000) – 30,000 = 200,000
- Proportion of by-product production costs = (2,000 / 200,000) * 100% = 1%
- Main product price
3. Why is it necessary to determine product cost?
So why do businesses need to calculate product costs in detail and accurately? Below is the important role of price in managing business operations of an enterprise:
- Helps administrators control costs per unit and plan detailed resource allocation.
- Determine product selling prices and serve as a basis for determining the operating results of departments throughout the enterprise.
- It is the basis to help administrators plan selling price policies, competitive strategies as well as make other business decisions.
4. Calculate product costs quickly with 1C:Company Management software
Calculating product costs is an important and indispensable activity in the business management process. To shorten time as well as increase accuracy in data processing, businesses can refer to 1C:Company Management software. 1C:Company Management provides effective support in automating the business management process as well as data statistics within the enterprise. With the production cost calculation feature, businesses can receive the following benefits:
- Prices are calculated based on production costs such as labor, supplies, raw material costs, etc. Data is compiled promptly and synchronized on a system to help businesses produce results. Exactly.
- Businesses can choose the method of allocating general costs (according to the number of finished products warehoused or according to raw material norms) to receive results at the end of the period.
There are many different product cost calculation methods to help businesses choose to suit the production cycle. To save time and increase calculation accuracy, businesses can refer to 1C:Company Management software to support professional product cost calculation. Hopefully the above article has given you useful information. If you have any questions, please contact 1C Vietnam for answers.