The cost of the Finished Goods (FG) is not always straight forward as there are a few elements involved in the calculation. Here, we are trying explain the various elements one at the time. Hopefully it will eventually make sense to you.
Just so that we’re on the same page, the net cost of FG is the combination of
- Cost of Raw Material (RM)
- Cost of Direct Labour
- Cost of Indirect Labour (E.g. Factory Overhead, General Overhead, Finance or Operating expenses)
- Possible Wastage (+/- 3%)
- And some companies would also allocate a mark up at this point.
For you to fully understand this, think about it, each time you produce something, apart from raw material cost, you’ll need to hire a factory worker to process this? And there is electricity (or gas for some cases) bill to pay? Yes, technically, all these needs to be accounted for.
An easier way to think about it is this – how much would it cost if you decide to outsource the production of the goods to a third party? Each time you need the goods, it would be shipped to your door step. Now how much would that cost (per unit)? And that’s the way to think about your Cost of Finished Goods.