Production costing: cost of a finished product

Production Costing: What It Means

Production costing is the process of calculating the total cost to manufacture a finished product. When you assemble or build an item in Usystems, the system tracks every raw material, component, and resource that goes into that product and adds up their costs to arrive at a final cost per unit.

Why it matters

Knowing your production cost is essential for:

• Pricing decisions. You need to know what a product costs to make before you can set a profitable selling price.
• Profitability analysis. When you compare the cost to the selling price, you can see your gross margin per product.
• Inventory valuation. For financial reporting and tax purposes, your inventory is valued at cost, not at selling price.
• Production efficiency. Tracking costs helps you spot which products are expensive to make and whether you can improve your process.

How it works in Usystems

Production costing in Usystems is based on your Bill of Materials (BOM). A BOM is a recipe that lists all the ingredients and quantities needed to make one finished unit. The cost calculation works like this:

1. Components have costs. Each raw material and component in your BOM has a unit cost (e.g., 50 AFN per kilogram of fabric).
2. Usystems multiplies quantity by cost. For each component in the BOM, the system calculates: Quantity × Unit Cost. For example, if a shirt uses 2.5 kg of fabric at 50 AFN/kg, that component costs 125 AFN.
3. Total cost is the sum. The system adds up the cost of all components. If a shirt also needs buttons (10 AFN), thread (5 AFN), and labor overhead (20 AFN), the total production cost is 160 AFN per shirt.
4. The finished product is valued at this cost. When you complete a production run, Usystems adds the finished goods to inventory at this calculated cost, not at the selling price.

Standard cost vs. actual cost

Usystems uses standard costing by default: each product has a fixed cost per unit based on its BOM, calculated at the time the BOM is created. If component prices change later, your standard cost does not automatically update. This approach is stable for planning and accounting, but you should periodically review and update BOMs to reflect real price changes.

Where you see production costing

• Product detail page: The BOM section shows the total cost per finished unit.
• Production reports: After you complete a build, Usystems reports the cost per unit manufactured.
• Finished goods inventory account: The balance in your accounting ledger reflects the quantity and cost of items you have produced.
• Cost of Goods Sold (COGS): When you sell a manufactured item, the production cost flows to COGS, reducing your profit.