Production Cost

Production cost refers to the total expenses incurred by a business to manufacture a product with the aim of selling it in the market. It represents the financial outlay required to transform raw materials into finished goods and is a critical factor in pricing, budgeting, and profitability analysis.

Components of Production Cost Production costs are typically divided into three main categories:

1. Direct Material (DM) The raw materials that are directly used in making the product. Costs are easily traceable to each unit of product. Example: Steel used in a car, flour used in bread.
2. Direct Labour (DL) Wages and salaries paid to workers directly involved in production. Costs are directly associated with manufacturing the product. Example: Payment to assembly line workers in a factory.
3. Manufacturing Overhead (MOH) All indirect costs related to production that cannot be directly traced to a specific product. Includes utilities, factory rent, depreciation of machinery, maintenance, and factory supplies. Example: Electricity for running machines, salaries of supervisors. 

Importance of Production Cost Helps in pricing products appropriately. Assists in profitability analysis and cost control. Supports budgeting and financial planning. Enables comparison of production efficiency across time or units.