A production cost report details the total cost, including raw materials and operating costs, of producing a product. Production cost reports (PCRs) are also sometimes called cost of production reports, product cost reports or process cost summaries. Production cost reports vary somewhat in level of detail provided, but in general PCRs offer a comprehensive breakdown of all expenses associated with producing a product, and they typically conclude with a section that computes the equivalent cost per unit.
History of PCRs
Although the idea of keeping track of how much it costs to produce/sell a product has been practiced by businessmen of all cultures for many centuries, the concept of describing costs as an additive process in a flow-chart type form became the norm in accounting practice and pedagogy by the 1970s. More formal models and variants were developed, and, in 2011, both the weighted-average method and the first in, first out (FIFO) methods of producing PCRs are taught in most business schools.
Uses for PCRs
PCRs are very useful for business managers to enable them to make informed decisions about currently marketed products and product development. Having a thorough understanding of the factors involved in the cost of a company's products allows decision-makers at businesses to model various strategic long-term decisions regarding suppliers, product, mix, future product development and so forth.
PCRs and Marketing
PCRs inform the decision-making of managers on many levels, including marketing. Knowing the actual cost of a product, and how that cost is likely to change over time, helps managers make decisions about allocating sales and marketing resources. Having accurate cost information enables managers to adjust prices to find ideal price points and/or increase commissions to incentivize sales forces. That information also may prompt managers to decide to spend more money advertising a specific product because the current profit margins are very high.
Creating a PCR
Creating an accurate, useful PCR requires input from all aspects of a business model. A thorough PCR includes everything from raw materials to energy to labor to storage costs, and includes both direct and indirect costs. PCRs can be formatted in various ways, and almost all PCRs produced in 2011 include a number of graphics from comparative charts and tables to an overall flowchart illustrating the cost process.
- Financial Terms: Cost of Production Report
- Research in Higher Education Journal: Teaching Students the Production Cost Report - an Evaluation and an Alternative; Lawrence, Johnson & Grambo
- Principles of Accounting: Process Costing - Cost of Production Report First-In, First-Out
- PrenHall.com: Cost Information for Pricing and Product Planning - Chapter 6