In business, profitability occurs when revenue exceeds expenses. Using the total cost of a product to calculate expenses gives you a more accurate picture of profitability. The total cost of a product takes into account a wide range of expenses, including all fixed and variable costs associated with producing the product.
Determine the accounting period for your calculations. To calculate your monthly total product cost, add the total fixed and variable costs for the month (that is, costs that represent a constant value and costs that fluctuate, respectively). If you want to determine annual product cost, add the total fixed and variable costs for the year.
Compute the sum of all fixed costs associated with the product. Fixed costs exist even if a business does not produce any goods, and they remain constant regardless of the number of units produced. Overhead items represent the most common fixed costs and include all items associated with running the business. Example overhead costs include rent, utility payments and insurance premiums. Other potential fixed costs include equipment costs and depreciation. Identify these expenditures within the business accounting records and add the items to determine the total fixed costs.
Compute the sum of all variable costs associated with the product. These costs can vary depending on how many units your business produces. Direct labor and material costs constitute the most common variable costs associated with an item. "Direct labor" refers to the wages paid to workers directly involved with the item’s production. Add the labor and material costs to determine the total variable costs.
Calculate the total cost of all products by adding the total fixed and total variable costs. This sum represents the total cost of all units produced.
"Average cost" refers to the per-unit cost of a product. Calculate average cost by dividing the total product cost by the number of units produced.
- “Economics;" Campbell R. McConnell and Stanley R. Brue; 2002
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