Cost of production comprises all costs incurred directly or indirectly in the production of a product or the provision of a service. It forms a key basis for pricing, corporate management and the valuation of assets in accounting.
By calculating production costs, companies can determine how much production actually costs and whether products are being manufactured cost-effectively.
Typical components of production costs include:
- Costs of raw materials, consumables and supplies
- Manufacturing wages and labour costs in production
- Costs of machinery and plant
- Energy and running costs
- production-related overheads
- pro rata administrative and infrastructure costs (where permitted)
The cost of production serves, amongst other things, to:
- Calculating selling prices
- to assess the profitability of products
- To analyse cost structures
- Valuing inventories and stocks on the balance sheet
- to make well-informed production and investment decisions
A precise understanding of production costs helps companies to improve their efficiency and optimise their margins in a targeted manner.
For start-ups and young companies, production costs are particularly relevant, as they have a significant impact on:
- the pricing strategy
- the gross margin
- the scalability of the business model
- long-term profitability
Anyone who does not know their production costs precisely runs the risk of pricing their products too low or misjudging the actual profitability of their business model.
innoWerft helps start-up founders to analyse their cost structures transparently, develop economically viable pricing strategies and build sustainable business models.