Production cost and total cost
The costing scheme in four lines: material plus conversion gives production cost, then administration and selling are added.
Worked example
An order uses £9,600.00 direct materials and £9,000.00 direct labour. Overhead rates: material 28%, production 65%, administration 10%, selling 9%. Work out the production cost and the total cost.
Worked solution
- 1.Material cost = £9,600.00 + 28% = £9,600.00 + £2,688.00 = £12,288.00
- 2.Conversion cost = £9,000.00 + 65% = £9,000.00 + £5,850.00 = £14,850.00
- 3.Production cost = £12,288.00 + £14,850.00 = £27,138.00
- 4.Total cost = £27,138.00 + 10% + 9% of production cost = £27,138.00 + £2,713.80 + £2,442.42 = £32,294.22
Typical mistake: Applying administration and selling overheads to direct costs instead of production cost.
Your turn
Three problems of exactly this type, each time with new numbers. Amounts with or without thousands separators.
Task
An order uses £3,800.00 direct materials and £9,900.00 direct labour. Overhead rates: material 23%, production 90%, administration 12%, selling 10%. Work out the production cost and the total cost.
Production cost in £
Total cost in £
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Formulas for this topic
- Material cost = direct materials + material overhead
- Conversion cost = direct labour + production overhead
- Production cost = material + conversion
- Total cost = production cost + administration and selling overheads
- Discounts are deducted from the higher price: divide by (1 − rate)
Typical mistake: Applying administration and selling overheads to direct costs instead of production cost.
Frequently asked questions
What is the typical mistake in "Production cost and total cost"?
Applying administration and selling overheads to direct costs instead of production cost.
Why divide for discounts?
The customer deducts the discount from the higher price, so you divide by (1 − rate) to end up with the price you need.