Process Cost Calculation Formula ( Manufacturing Cost Calculation / Production Cost Calculation Phase 2 + 3 )

For Calculating Process cost, we have taken an example of drilling operation,

Firstly, we should have knowledge about the number of processes to be performed to make a particular product,

We should have knowledge about the total cost imposed on each and every operation.    We should have knowledge about the labor wages,

We should have knowledge about the land rent, electricity charges, machine power, etc.                                                                                                                         

We should have knowledge about the yearly production 

For example

Let’s say that there are two processes namely

1.     Drilling

2.     Gauging

Here we are discussing only the drilling process to understand the concept of process cost

Now, we will try to find out the process cost of the drilling process               

Process cost is the main phase of finding out the cost of a product, so understand it carefully.

Calculation of Process cost

For finding out the Cost imposed/drill done, various factors have to be studied: -

Let us assume the following information

Drilling Machine Cost = Rs 50000

The lifespan of Machine = 5 years

Drill bit used per year = 100 nos

Cost of Drillbit = Rs 5 / Piece

Labour working on machine = 1, Helper =1

Wages per month per Labour = Rs 2500

Electricity Charge = Rs 6/unit and in 1 day 10 units were consumed

Land rent of area, where the machine is installed = Rs 100/Month

Let us assume that there is an order of 60000 pipes with a single drilled hole in it for a whole year. So first we will find out the number of working days in a year                  

= 365 – 52 Sunday – 13 festival days = 300 working days

Now first we will find every cost per piece step by step then we can easily find the cost imposed per drill done.

Calculation of Labor cost

As there are 60000 pieces to be delivered in 300 working days so

Per day Production = 60000/300 = 200 pieces

Let us suppose that factory is working in one shift of 8 hours

So Per hour production = 200/8 = 25/hour

So the production = 25 pieces/hour,

Labour working = 2 nos

Labour wage given = 2 X 2500 = Rs 5000/month

Labour wage per day = 5000/ 25 days (Working days in a month)

Labour working = 2 nos

Labour wage given = 2 X 2500 = Rs 5000/month

Labour wage per day = 5000/ 25 days (Working days in a month)

Calculation of Consumable tooling cost

Production = 25 pieces/hour,

Drill bit used = 100 no's/Year

Drill bit cost = Rs 5/Bit

Drill bit total cost = Rs 5 X 100 = Rs 500

Drill bit cost per day = 500/ 300 days (Working days in a year)

Drill bit cost / day = 500/300 = Rs 1.66

Drill bit cost per hour = 1.66/8 = RS 0.2075

So Drill bit Cost/Piece = Rs 0.2075/25 = Rs 0.0083

Calculation of Electricity consumed

Production = 25 pieces/hour               

No of machine working = 1 no’s

Per Unit rate = Rs 6/Unit

No. of unit consumed per day per machine = 10

Electricity cost per day = 6 X 10 = Rs 60

Electricity cost per hour = Rs 60/8 = RS 7.5

Electricity Cost/Piece = Rs 7.5/25 = Rs 0.30

 

Calculation of Land Rent Price                                                            

Production = 25 pieces/hour,

Land rent of space on which machine is installed = Rs 100/month

Land rent of space = Rs 4/Day (25working days in a month)

Land rent of space = Rs 4/8 Hours

Land rent of space = Rs 0.5/ Hours

Land rent of space/Piece = Rs 0.5/25 = RS 0.02

Calculation of Machine cost

Production = 25 pieces/hour,

Machine Cost = Rs 50000/ 5Year

Depreciation cost = Rs 50000/5 years = Rs 10000

Cost per piece = Rs 10000/ 60000 (total production in a year)

So, Machine cost / piece = RS 0.17

Final Sheet for calculation of Process Cost

Production = 25 pieces/hour,

1. Labour Cost = Rs 1 /Piece

2. Consumable tooling cost = Rs 0.0083/Piece

3. Electricity Consumed = Rs 0.30/Piece

4. Land Rent Price = Rs 0.02/piece

5. Machine Cost = Rs 0.17

So, the total process cost will be the sum of all the above costs 

= Rs 1+0.0083+0.30+0.02+0.17 = Rs 1.4983

Step 3. Final Phase of Manufacturing cost

For calculating overhead and other cost, firstly we should know about all other factors that affects the manufacturing cost of a particular product. We should know about the total cost imposed on each and every operation

As we have already calculated the two cost

1.   Raw Material Cost

2.   Process Cost

Now we will do the calculation of overhead and other cost imposed on the above two costs.

Factors that effects the overhead and other cost are :

Rejection Cost

Overhead Cost

Inventory Carrying Cost

Profit

Tool Amortization Cost

Brought out Product Cost

 

Rejection Cost

Whenever we makes products in mass production, there is chance of rejection also that the products which are produced are not 100 % accurate and there is chance that some manufactured products may differ from the actual products and if they are out of tolerance limit, they will be counted in rejection.

In general, we take rejection as 1 % imposed on the total (raw material + Process) cost.

 

Overhead cost

It is the indirect expenses of operating a business that range from rent to administrative costs to marketing costs. It may includes rent, staff salaries, liabilities , insurance cost, utilities, accounting cost, telephone bills, office supply, advertising and promotions etc.

In general, we take overhead cost as 15 % imposed on the total process cost.

 

Inventory Carrying cost

It is the total of all expenses related to storing unsold goods. We have to keep a separate space for storing inventory that is ready to dispatch material. We store this material to overcome any type of shortage to the customer so we keep inventory to us.

In general, we take inventory carrying cost as 1 % imposed on the total raw material cost.

 

BOP (Brought Out Parts) Cost

If we are using any type of Brought out part (BOP) to be assembled in our product before providing to the customer then the amount of BOP assembled will also be added in our costing sheet.

This amount is directly added as received from vendor or market.

 

Final Sheet for calculation of Overhead and other Cost

 

So the total cost will be sum of ( C to I ) = Rs 14.56

For more information.

Please see my video on youtube at the following link

For English language   https://youtu.be/pLe4B92fh_A

For Hindi  Language Part 1  https://youtu.be/dyw6deHOMNM

For Hindi  Language Part 2  https://youtu.be/x_VN1NBZA1s

For Hindi  Language Part 3  https://youtu.be/KsxsZLlE3Pw