What are direct costs of production?

Production costs are managed through an accounting process that handles detailed information with which establishes the cost incurred in the realization of a certain product, this system includes the direct production costs as well as the external ones for each of the activities in which the production process takes place.

The costs represent expenditures and charges associated directly with the production or acquisition of products, goods or services, of which an economic entity is called a company, will obtain income.

Direct costs of production (CD)

They are those that are directly associated with the production of a product and must appear in the cost accounting of the same.

These are derived from the existence of that whose cost is to determine, either a product, a service (see difference between product and service

) or an activity. They are mostly expenses necessary to maintain a project in general. Although it has characteristics that are sometimes not understood by those who venture into establishing a business. One of them is that to produce goods it must be spent, the other is that costs must be kept as low as possible.

• Raw material.
• Direct labor.
• Supervision.
• Services.

Raw material

This cost is made up of all the raw materials, whether they are the main and subsidiaries that are directly or indirectly necessary in the production process.

The estimation of this is carried out through knowledge of:

• Quantities of raw materials required to produce the product unit.
• Unit prices of raw materials placed in the factory.

Direct Labor (MOD)

This cost includes the wages or salaries of workers and employees whose effort is obtained as a result of the manufactured product.

In mechanized processes, labor represents less than 10% of the production cost, but in manual operations it can exceed 25%.

It is calculated according to the man-hour cost of the production process. The basic cost of this is previously given according to labor agreements, where the social charges that are normally paid by the employer are added.

Supervision

It includes the salaries or salaries of the personnel in charge of and responsible for the direct supervision of the different operations of the production process. It can be estimated in the same way that direct labor is estimated taking into account that in many In these cases, these personnel entail certain preparation and knowledge and that they perceive their assets according to it. Also in this case, social charges must be included on the basic salary.

Services

Electric power, gas, water and others.

To determine these costs, an estimate is made of the consumption of said services in the process production and thus establishes the average cost of each service in the elaboration of the product.

It should be noted that this cost is variable and depends on many factors, but nevertheless it must be included in direct costs since it directly intervenes in production and in the final cost of the product.

Maintenance

Either by routine or by eventualities, the equipment needs constant maintenance to extend its useful life and serve productively. This cost includes the costs of materials and labor that are used in said routine maintenance or repair of the equipment and machines installed in the production process.

The employer must bear in mind that the maintenance cost increases according to the life of the equipment and in these estimates average numbers should be used.

There are countries and companies where maintenance is a critical factor, with insufficiency and in the worst case total absence of maintenance, which is extremely detrimental to the useful life of the equipment.

Supplies

It includes all the materials used and that are necessary for the proper functioning of the production plant, oils, bulbs, lubricants, chemical reagents, detergents, cleaning supplies, that is, the materials used except those included in raw materials, repair materials or packaging.

Packaging

This cost can be considered within the cost of raw material, but there are companies that handle it separately to better detail the different packaging that the product requires. Similarly, this is calculated per product unit and is included in the total budget. It should be noted that there are different packaging possibilities for the same product and it is the marketing team's job to make the pertinent decision of which one to use, either for price or quality.

Characteristics of direct costs

• All direct costs incurred in production are divided into fixed and variable.
• The variability of some costs is kept in their respective accounts and does not limit the product costing process statistically.
• Only the cost per unit should be included in the total cost of the product.
• The direct cost of production is used in the evaluation of the raw material and the calculation of sales costs.
• Fixed costs must also be evaluated since they are given in function of a certain time.

In summary and to conclude, it is worth knowing that both in the production, marketing and support areas, there are direct costs that are easily assignable and others that are not. In many cases it will depend on the operating characteristics of the company.

Direct costs are carried by production area and although ultimately, what interests the shareholders of a company is the return on investment and total profit, it would be serious to ignore the importance of profitability by activity or line of product.

Information about the various costs and their variations is vital for effective decision making regarding the marketing, sale and life of the product. A product that is not profitable must be evaluated to affect change or eliminate it from the production line since the company cannot produce a loss as this affects the total profitability of the same and can lead to bankruptcy to maintain that condition for a long time.