Production cost
Production cost is the cost of making goods or providing the production activity being costed. Under absorption costing it includes direct materials, direct labour, direct expenses and production overhead. Non-production functions such as selling and general administration are separated. Marginal production cost includes variable production costs only, so specify the method before calculating a unit cost or inventory amount. Classification by function is separate from fixed-versus-variable behaviour.
Worked example
Materials $5, labour $3, variable factory overhead $1 and fixed factory overhead absorbed $2 give $11 absorption production cost per unit, or $9 marginal production cost.
Common mistake
Do not include a variable selling commission in production cost simply because it changes with units sold.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | MA | Direct | September 2026–June 2027 |
| FIA | FMA | Direct | September 2026–June 2027 |
