Production Cost

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DEFINITION of 'Production Cost'

A cost incurred by a business when manufacturing a good or producing a service. Production costs combine raw material and labor. To figure out the cost of production per unit, the cost of production is divided by the number of units produced. A company that knows how much it will cost to produce an item, or produce a service, will have a clearer picture of how to better price the item or service and what will be the total cost to the company.

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BREAKING DOWN 'Production Cost'

Businesses that know their production costs know the total expense to the production line, or how much the entire process will cost to produce the item. If costs are too high, these can be decreased or possibly eliminated. Production costs can be used to compare the expenses of different activities within the company. In production, there are direct costs and indirect costs. For example, direct costs for manufacturing an automobile are materials such as the plastic, metal or labor incurred to produce such an item. Indirect costs include overhead such as rent, salaries or utility expense.

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