Complete Elements of Cost of Production with How to Calculate – In this article we have provided information about the elements of cost of goods sold what you need to know, keep reading in this article and happy reading!

Production costs have a large impact on the cost of a manufacturing company. Production costs are recognized for the purpose of procuring goods or producing finished goods, because production costs are incurred in an effort to acquire assets, these expenditures are costs or profits.

The production cost of a manufacturing company can be calculated if the production costs are known. To get a specific cost of production, we need to capture and choose which costs are included in it. Then all costs are recorded, we can calculate how much production costs are in accordance with existing needs.

Calculation of production costs intends to determine the amount of production costs incurred in making an object.

What is Cost of Production

Production costs are statements of production costs that must be incurred by the company during a certain period of time. This refers to the acquisition cost of raw materials, production equipment, production support materials, and so on.

If these costs are covered, it will be easier for the company to determine product prices. At least the price of the product to be sold has been carefully calculated between the profits and losses that will arise from the sales made.

  1. According to Susilowati (2009), production costs are all financing charged to products and services and can be measured by the money to be submitted.
  2. According to Supriyono (2013), production costs are the amount of money paid to obtain products or services needed by the company as a means of making a profit.

Reading from the definition above, it can be concluded that the meaning of the cost of implementation is the accumulated costs that must be incurred by the company to produce the product/service to be sold.

Components of Cost of Production

In general, the production costs include raw material costs, direct labor costs, and factory overhead costs

Raw Material Costs

Commodities are materials that are mostly in the form of semi-finished products or become a tangible part of a product that can be traced back to that product.

Raw Material Planning and Control

The design of the main materials is influenced by the nature of the company's production activities, whether production activities depend on receiving orders from customers (buyers) or on mass production activities or processes.

In general, material planning is easier to do in companies whose production activities are in the form of process or mass production compared to companies that produce to order.

More clearly, however, is that in all companies the purpose of planning and control has two main objectives, namely to minimize (minimize) costs and to maximize profits in a certain time and in a certain way.

Purchase of Raw Materials

Materials purchased are received by the goods receiving department and checked for conformity with the ordered goods, the goods receiving department makes material receipts and distributes them to the material warehouse, purchases, bookkeeping, archives. Materials are transferred to the materials store.

The warehouse department receives purchased materials based on the material receiving report document and enters them into the warehouse card and item card depending on the type of material purchased. Supplier purchase invoices go to Purchasing and, once approved, are forwarded to Accounting.

Labor costs

Labor costs arise and are required in a production process to convert raw materials into finished goods. These costs relate to the use of human resources or labor in the manufacture of a product.

Management really needs timely and accurate work force cost information that can be used as a basis for planning, controlling and decision making.

Human resource planning is an integral part of the budgeting process. Workforce cost budgets can be made based on production plans and data on time targets and cost targets set.

Labor costs are a certain price or amount in rupiah paid to workers or employees working in the production department.

2 Matter Existing in Labor Costs

  1. Direct labor costs are labor costs that can be associated with certain operations or processes required to complete a company's product.
  2. Indirect labor costs are all labor costs that are indirectly involved in the production process, i.e. cannot be identified specifically for a particular operation or production process.

Overhead Costs

Direct materials and direct labor are the main costs of a product. Factory overhead includes all other costs involved in making a product.

All production costs except direct material costs and direct labor costs, which consist of three groups of costs, namely indirect material costs, indirect labor costs and other indirect production costs such as water, electricity, telephone, insurance, taxes, maintenance, depreciation and so on.

Factory overhead is all costs to produce a product excluding direct materials and direct labor, namely indirect materials, indirect labor and all other indirect costs.

Typically, factory overhead can be divided into three main groups, which are as follows:

  1. Auxiliary resources and operations are materials used in production which, due to economic and practical reasons, cannot be assigned directly to certain cost units. In other words, plant equipment is the cost item that keeps the plant in good operating condition, such as: B. Lubricating oil and cleaning and safety equipment.
  2. Indirect labor is all factory labor costs that are indirectly involved in the production process of a product and are classified as direct labor costs, such as:
  3. Other indirect costs, these costs include various types of factory overhead costs, which cannot be classified as indirect material costs or indirect labor costs.

For example, the calculation of production costs must include the calculation of raw material costs, labor costs, and overhead costs in determining the selling price of an item or service so that the estimated costs are in accordance with the actual calculations.

How to Calculate Cost of Production

Product costs are based on the amount of work in process completed. This work in process includes the cost of direct materials used in production plus direct labor and overhead.

To calculate work in process, you enter the number of units, or costs, in the same output formula that you use to calculate the direct materials used in production.

The standard equation for calculating product costs is as follows:

  1. Finished goods in progress on your start date
  2. Plus your direct costs (materials + labour),
  3. Plus your production costs,
  4. Subtract your current items to the calculation end date.


Following are some questions and answers regarding the elements of cost of implementation as follows:

What is the HPP formula?

HPP stands for production costs. In simple terms, COGS are the direct costs incurred by goods produced and sold.

What are the Methods for Determining Cost of Production?

Methods of determining production costs. In calculating the cost elements in production costs there are two approaches, namely full costing and variable costing.

Explain what is meant by HPP Cost of Production?

HPP stands for production costs. In simple terms, COGS are the direct costs incurred by goods produced and sold.


Production costs have a large impact on the cost of a manufacturing company. Production costs are recognized for the purpose of procuring goods. Materials are given to grocery stores. These costs are related to the use of personnel or labor in the manufacture of a product. Thus this article, hopefully this information can be useful.

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