Therefore, the company should go ahead with the bidding process. $3.00 per piece, which is less than the bidding price
As per the account’s department, the following information is available,īased on the given information, Calculate whether the company should go ahead with the bidding process. So, the management decided to determine the per-unit production cost incurred during last year. The company is planning to bid for a large volume (1,000,000) 6-monthly contract at the rate of $4.00 per piece. Let us take the example of a company that is associated with the manufacturing of mobile phone covers. Therefore, the production cost of the company add up to $1.39 million for the period. Product Cost = Direct Material Cost + Direct Labor Cost + Manufacturing Overhead Cost Product Cost is calculated using the formula given below Manufacturing Overhead Cost = Indirect Material Cost + Indirect Labor Cost + Other Overhead Cost As such, the formula for total cost is very useful for all business.Manufacturing Overhead Cost is calculated using the formula given below Nevertheless, the total fixed cost is also equally important because it is the sum of total fixed cost and total variable cost which when deducted from the revenue will give the company profit. Principally, the total fixed cost is not expected to change over a shorter period of period and so the total cost of production is primarily driven by the change in average variable cost per unit. The concept of the total cost of production is very important to understand from the perspective of production managers because it helps in the assessment of overall profit margin at a different level of production. Total Cost = Total Fixed Cost + Average Variable Cost Per Unit * Quantity of Units Produced Relevance and Uses of Total Cost Formula Step 4: Finally, the formula for total cost can be derived by adding the product of average variable cost per unit (step 2) and quantity of units produced (step 3) with the total fixed cost of production (step 1) as shown below. Step 3: Next, determine the level of production or the number of units produced. Some examples of the variable cost of production are labour cost, raw material cost, etc. Step 2: Next, determine the average variable cost per unit for those expenses which are dependent on the level of production. Some examples of the fixed cost of production are selling expense, rent expense, depreciation cost, etc. that cost which do not change with the change in the level of production. Step 1: Firstly, determine the cost of production which is fixed in nature i.e. The formula for total cost can be derived by using the following five steps:
Average Variable Cost Per Unit = $4 + $2.Total Fixed Cost = Depreciation Cost + Rental ExpenseĪverage Variable Cost Per Unit is calculated using the formula given belowĪverage Variable Cost Per Unit = Raw Material Cost Per Unit + Labour Cost Per Unit Total Fixed Cost is calculated using the formula given below Based on the given information, Calculate the total cost of production when the quantity of production is: On the other hand, the raw material costs and labour costs of production per unit $4 and $2 per unit. Let us take another example where the depreciation cost and rental expenses are $15,000 and $5,000 respectively.
In this example, it can be seen that the total cost of production is directly proportional to the level of production. Total Cost = Total Fixed Cost + Average Variable Cost Per Unit * Quantity of Units Produced Total Cost of Production is calculated using the formula given below
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