Production Cost Sheet Significance in Manufacturing
Profitability and success of a manufacturing business depends on how efficiently they can produce quality goods at economic costs. Production Cost Sheet is an important means to understand exact production cost & make informed decisions to implement cost saving measures.
In this article, we will start with importance of calculating production costs, discuss what is production cost sheet, understand the challenges faced in preparing a cost sheet, highlight the benefits of preparing production costs sheet for manufacturing companies.
Why knowing accurate production cost is important for manufacturers?
Calculating & knowing accurate production costs is crucial for following reasons:
- Cost Control: Having accurate & detailed break up of Production costs helps identify problem areas and implement cost-saving measures, thus improving profitability.
- Pricing Strategy: Knowing production costs enables manufacturers to set competitive prices.
- Budgeting and Planning: Ensuring proper budgeting, planning and future expenses forecasts requires accurate production cost information.
- Actual vs Estimated comparison: With correct production cost data, companies can compare actual vs estimated expenses and make necessary adjustments for cost savings.
What is a Production Cost Sheet?
A production costs sheet is a document, that provides detailed information of all types of costs incurred by a manufacturing company, for production of goods. It provides details of direct and indirect costs, helps in tracking and managing expenses. Thus, manufacturing companies come to know, exact production cost per unit, and can make informed decisions for controlling production costs.
How to prepare a Cost Sheet?
For preparing a cost sheet, companies must identify all costs likely to be incurred during production process. Then classify these costs into direct and indirect costs. Further allocate the indirect costs of production in the correct ratio. Given below are the various components of production cost sheet. A sum of all these costs will provide the accurate total cost of production. A production cost sheet typically includes the following:
- Direct Costs: These are the expenses directly incurred for production of goods such as cost of raw materials used, salaries of labourers, plant & machinery maintenance costs etc.
- Indirect Costs: These are the expenses which are essential for production operations. E.g. facilities, utilities, administration etc.
- Selling & Distribution Costs: Costs incurred during logistics, marketing and sales of the produced goods
What difficulties companies face while preparing cost sheet?
Although it appears straight forward, calculating production cost is a complex process that involves several variables and factors, hence making it difficult to prepare. Here are some reasons:
- Data present in silos across departments needs reconciliation if operations are managed manually or using disparate systems
- Different types of costs such as raw material, freight, labour, electricity etc. and allocating it properly is a challenge and sometimes prone to errors
- Complexity of production processes such as multiple stages, multiple inputs etc.
- Fluctuations in input costs and changes in production quantity makes it difficult to allocate the indirect costs appropriately
Thus, for preparing an accurate production cost sheet, it is important to have accurate information of various costs. There must be good coordination and collaboration among different departments such as production, procurement, and finance, to ensure accurate cost sheet preparation.
An ERP software helps achieve this objective by providing real time accurate data and various costing reports such as: Cost of Production, Cost of Overheads, Departmental Expenses, Cost of Materials, Work in Progress (WIP) etc.
What are the benefits of preparing a cost sheet?
Preparing a production cost sheet has several advantages such as:
- Cost Determination: It helps manufacturers determine cost of producing each unit and judge the competitiveness in the market.
- Identify areas of improvement: It helps to identify areas where costs are high. This helps manufacturers take corrective steps to reduce costs.
- Control Costs: Continuously tracking production expenses helps companies maintain production costs within the estimated range.
- Judge profitability: It helps assess the profitability of products and take decision accordingly.
- Compliance & Reporting: Production cost sheet is essential for ensuring transparency, proper financial reporting as well as regulatory compliance
Summary
The production cost sheet is an important document that enables manufacturers to understand their production costs and optimize the same. Leverage an ERP software to prepare accurate Production Cost sheet and analyze pattern of expenses; review whether they are in line with the estimates or need course correction and take actions accordingly. This will help manufacturing companies improve their competitiveness and achieve sustainable growth.
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