How to Calculate Production Cost

To be profitable in your business, you need to set your prices higher than the cost of production. Cost of production, according to Gary Frank at the University of Wisconsin at Madison, is "the costs associated with production divided by the
number of units produced." By understanding your cost of production, you will know what to charge your customers for your product and whether your current pricing is set for your business to be profitable.

Instructions

    • 1

      Understand the cost of production formula. The formula is fixed costs (FC) + variable costs (VC) divided by number of units = production cost per item.

    • 2

      Determine your fixed costs. These are the costs that do not change based on the number of products produced. For instance, the rent you pay for your building, employees' salaries and utility costs are all fixed costs.

    • 3

      Calculate your variable costs, i.e., the costs associated with making your product that change based on the quantity of the product produced. For instance, if you are making a cake from scratch, some of the variable costs would be the eggs, flour and sugar.

    • 4

      Add your fixed costs to the variable costs and divide by the number of items produced; this equals your cost of production for one item. The price you are charging for your product will need to be greater than the cost of production; otherwise, your business will be operating at a loss.

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