Ep. 469 - Understanding Production Costing

Production costs refer to all of the direct and indirect costs businesses face from manufacturing a product or providing a service. Production costs can include a variety of expenses, such as labor, raw materials, consumable manufacturing supplies, and general overhead. - Investopedia

Join Rob as he discusses the importance of production costing, the ideal time to break down your product costs, and the methodology he is using to break down the costs of various products created here on the homestead.  

Learn how to access the product costing spreadsheet he's created for FREE in addition to learning more about upcoming episodes and the 🔴LIVE STREAM🔴 this week! 

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Discussion Links:

Food Forest Farms - Enterprises - Food Forest Farms Coffee ...
https://www.foodforestfarms.com/index.html

Production Costs: What They Are and How to Calculate Them
www.investopedia.com/terms/p/production-cost.asp

Production cost refers to all of the expenses associated with a company conducting its business while manufacturing cost represents only the expenses necessary ...

Product cost definition - AccountingTools
www.accountingtools.com/articles/what-is-product-cost.html

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Transcript

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SPEAKER_00 0:10

Hi there, welcome back to another episode of the All Around Growth Podcast. My name is Rob Kaiser and I am your host. Today is Monday, November 21st, 2022. And this is episode number 469 of a show where you join me with my family on our small farm and homestead as we talk about the five W's and how as we grow all around here on the Homestead at York Meadow Farm. And in today's show, we are going to talk about production costs, specifically what they are and how to calculate them. And we are also going to outline the show for the rest of the week so that you know what to expect for each day this Thanksgiving week. And we will also provide some information about the live stream this week. But before we do that, let's go ahead and mention the sponsors of today's show. First of all, we've got Food Forest Farms, a locally owned and operated Beyond Organic Biointensive City Farm, Coffee Roaster, Consultant, and more. You can learn everything, or you can learn more about everything that is going on at foodforestfarms.com. And that is where you will also find links to Scrambling University, The Squatch Fest, and more. Second of all, I'd like to mention BuzzSprout. And I mentioned BuzzSprout because if you want to start a podcast, but you're not sure on which podcast host to use, I would definitely consider trying BuzzSprout. Why? Look, not only is it the podcast host that I use, but I've used multiple other ones in the past, including Libson. And when I finally got serious about this, I decided to use BuzzSprout. Buzz Sprout is one of the best uh podcast hosting platforms. They've been around for over 10 years at this point. They've been around since 2009, I think. And if I'm not mistaken, over a hundred thousand people have used Buzz Sprout to start a podcast, and I am one of them. Like many other podcast players or hosts, rather, you can embed the the podcast on your website. But with Buzz Sprout, it's super easy. And by doing this, your subscribers can easily, or well, they can people can easily subscribe to your podcast first and foremost, and then share easily across social media platforms. So Buzz Sprout gives you the ability to get your content out there and do so easily. So it connects with all sorts of podcast players like Pocket Cast, Google Podcasts, Spotify, Stitcher, what you know, whatever it is that you use or whatever it is that people use, all of those podcast players are listed in the directories, and it's super easy to connect them all. You uh it just click, click, click, it almost does it for you. So just look, if you want to start podcasting, start podcasting today with free podcast hosting from Buzz Sprout. It's the easiest podcast uh software in the world, as far as I'm concerned, for hosting, promoting, and ultimately tracking the message that you have to share with the world. So, look, guys, links to Food Forest Farms and Buzz Sprout will be in the show notes today. So check it out. Along with everything else that we're about to discuss. And speaking of what we're about to discuss, we are going to talk about production costs and more specifically what they are and how to calculate them. Before we dive into this article, we're gonna look at a couple of them actually. And before we dive into this article, we might as well talk a little bit about why, you know, why product costs, right? Why this is the topic of today's show. In the show, we talk about goals, we talk about goals a lot, and the show has almost become a rotating topic or rotating episodes, rather, of topics that pertain to these seven different aspects of life: physical, financial, personal development, family, spiritual, social, and career, right? And as the show has grown and evolved, we've begun to be more inclusive about everything that's taking place here on the homestead, in order to, you know, just share what we're doing on the homestead and what I'm doing in my life as it pertains to the homestead and beyond. And today is one of these episodes where we're gonna talk about financial, not necessarily financial goals, but this does tie into the business goals and things like that, and we're gonna talk about product costing. And this has become uh an increasingly more important topic to dive into. Not that it never was important, but it was a little less important, I guess you could say. And we we we had a rough idea of what our products cost because we, you know, we we obviously we know how much the stuff is when we buy it, and we know how much the materials are that we use, but we we didn't really do a deep dive into that, and we really started thinking about the importance of this, which excuse me. The reality is if you're doing anything, I think that it's important to do what I'm about to share with you before actually engaging in that activity, but that's not where we're at here, and that's okay, and that may not be where you're at either, depending on you know, if you're not in a position where you're not, you know, starting up your own thing, and that's that's me, and you could be an employee somewhere else, you could be um, you know, you could apply this to raising chickens, you could probably apply this to or these same concepts to uh baking bread for market or um anything really. So, anyways, let's let's to to to gain some information about this. The first article that I'm gonna bring up is from Investipedia, and what's cool is well, I brought up a number of different articles, so let's let's just do something here. Um, let me go ahead and find this, and I'll go ahead and blow this up, and I'll just simply share the screen with you. And for those of you who are listening right now, this is not going to be the uh ideal optimal audio experience, but as I'm learning how to record and I mean record both video and audio at the same time, things will continue to be a little smoother. But, anyways, what I do with regard to product costing, and in order to gain information about a topic to talk about it is I just simply look into my search engine of choice, which is pre search. And when I talk about it, those of you who are watching in video can see what I'm talking about with regard to how pre search interfaces with some of these different other platforms like Google or Twitter or Amazon or YouTube or whatever the case may be, you can simply search for product cost within any of these platforms, right? And it's very easy. And if you use Google, for example, and you have plugins or browser extensions like um keywords everywhere, it allows you to easily obtain that information as well, but also see search results that are a little less biased by utilizing pre search. So, you know, check that out. I'll link to pre-search in the show notes as well. But so I simply put input product cost and searched for that, and a number of articles came up accounting tools, corporate finance institute, uh, and then Investipedia. And the reason why I like Investipedia is when you um well when you when you initially go there, maybe it's not popping up right now, but it gives you the opportunity to subscribe to a newsletter that they provide, which provides the free term of the day, which can expand your investing vocabulary so that you can confidently follow financial news, right? So I've done that in order to learn more, and I wanted to include that in this show since we are talking about financial related topics today. But in terms of product cost, I thought this was a nice way to start the show because, well, let's first of all understand what they are and how to calculate them, and then I'll show you quickly how I do that or how I began to do it to so as to give you some ideas. And if you actually want, you know, I'm willing to share some of the work that I did, but you've got to join the telegram group t.me slash all around growth. And if you want the spreadsheet, I can give you the template and you can adjust accordingly, right? So, you know, there's that. I'm I'm happy to just freely share some of the work that I've done because that's what this is all about, you know. Um, as far as I'm concerned. So, anyways, production costs. What are they and how to calculate them? Production costs refer to all of the direct and indirect costs businesses face from manufacturing a product or providing a service. Production costs can include a variety of expenses such as labor, raw materials, consumable manufacturing supplies, and general overhead. The key takeaways from this article are production costs refer to the costs a company incurs from manufacturing a product or providing a service that generates revenue for the company. Production costs can include a variety of expenses such as labor, raw materials, consumable manufacturing supplies, and general overhead. We'll talk about that in a minute. Total production costs can be determined by adding together the total direct materials and labor costs as well as the total manufacturing overhead costs. All right. You know, for those of us who are running small businesses, we may think that this is not something that we really need to take into consideration. But I'm going to challenge you and say that that is not the case. And if you're not doing this, quite frankly, I think you're doing it wrong. Um, because we haven't been doing this for a while, and I don't want to say we've been doing it wrong, but I think that uh, yeah, maybe we were doing it wrong, and that's okay. There's always room for improvement all around growth, right? So we can also look at, and I'll just read you a couple definitions and I'll link to some of these articles as well in the show notes. But if you just search for product cost in pre-search, you can see everything that I'm seeing. But let's take another look at a couple different definitions. Product cost refers to the costs incurred to create a product. These costs include labor, direct labor, or these costs include direct labor. Direct labor is production or services, labor that is assigned to a specific product, cost center, or work order. When a business manufactures products, direct labor is considered to be the labor of the production crew that produces goods, such as machine operators, assembly line operators, painters, and so forth. All right. Again, I read this because not so much to intimidate you, but to allow you to understand that you know what this is all about is think about how larger businesses operate and why they operate that way. Efficiencies, cost savings, blah blah blah, corporate talk. Utilize those principles in your own operations in life, and you will see some of the you know the value or benefit that that that that comes along with doing so. Um, I am learning this now. All right, so how do we incorporate some of these ideas like uh overhead, um you know, some of the things that we that we just read about uh manufacturing costs, raw materials, consumable manufacturing supplies. What does that even mean, right? All right, all right, all right. Let's take a look at, and I'll just explain it from my point of view, from what we've been doing here on the farm and homestead, and I'll simply share with you and talk you through a spreadsheet that I created in order to break down our costs of the product. Now, I'm not gonna share with you the exact costs of the product, but I am going to share with you the methodology and how I got to finding the costs of the product, right? So, first of all, what we've got up here is we've outlined what the item is that we're trying to find the cost of the type of product, whether it's produce or root vegetables or spices, or in the case of jars, lids, rubber gloves, pH test strips, you know, we'll call those manufacturing supplies. All right. We've got a uh in the case that there's an online link or something for reference, a uh place to input the link where we've got the vendor, and you know, maybe the seller if they're a distributor, that information's going to remain secret. How it's received, whether it's a case, a bushel, a bag, a box, um, the contents of that case or box, you know, the type, whether it's a bag or you know, a box or bottles or jars, what have you. And in our case, since a lot of it is produce, we got the total pounds, the total ounces. We break that down into grams, okay. And then we've got pounds per, you know, ounces per grams per per unit, right? Because we're costing out the individual unit. For example, let's talk about jars. We get like we get them on a pallet, we get a lot of jars, and we buy lids by the thousand. So we want to understand what, and on that palette, there's multiple cases of jars. So we want to understand what the cost of the case is and what the cost of the individual jar is. All right. And we've got some room for you know comments and then the cost, and then we've got you know a markup, and this you can see this is highlighted in red, but because all of this is formulas, formulas, formulas, everything here is formulas, right? So, what we've got here is where we input our costs is right here. These three columns, we've got our input of costs, specifically here and here. All right. This is a markup that we're including for fuel, uh, you know, for pickups, uh, subscriptions, like Amazon Prime or Instacart, or just miscellaneous overhead costs. And and how how we're actually going to factor all of this in remains to be seen. That's why this column is highlighted in red. I basically just made a percentage of the cost to include that in the total cost, which sums up, you know, the cost, the markup, and the shipping for items that we are received shipped. And then at that point, once we have our total cost understood, we have we can further break down the cost per pound, the cost per ounce, the cost per gram, or in the case of hard goods, ultimately the cost per unit. Leave a space for comments for what those items are used for, for puree, for you know, freezing, for slicing, things like that. But this ultimately is your master sheet. And once you've got your costs in here and your formulas that determine all of your cost per unit, cost per pound, cost, total costs, then you can go ahead and create individual cost sheets for your products. So you've got your master product cost sheet identifying all of your all of your products. And in our in our case, we've got cabbage, nappa cabbage, cucumber, um, jalapenos, green onions, onions, beets, carrots, things like that, down to jars, lids, you know, uh hair nets or beard nets in in my case, the different types of vessels that we use to actually ferment the product in the different types of springs and and and every the the plates that we use to that to serve as followers, right? Everything that we use goes into those costs, and we'll take a look at our most expensive product again without identifying the actual costs, but we've got all of our all of our inputs here, right? And what we're good what what we're looking at with the inputs, we've got our inputs, we've got pounds, ounces, grams, and then maybe the quantity of each individual unit used and or produced, right? And the quantity of lids and jars in a batch will give us the actual cost of the product. So we've got all of our ingredients that go into everything here, and we'll go ahead and just uh you know minimize that so as to not give away our actual secrets here. But you know, you want to get your ingredients, how much you have, and then once you've got your costs on this master sheet, you can see how the average cost of these things are simple formulas that tie into that sheet. So as the costs of your products change, for example, maybe due to Shipping uh challenges and supply chain issues, the cost of your jars went up 30%. And let's just say that your jar could cost uh a dollar. All of a sudden now your jar costs a dollar fifty. Well, in this case, if you just simply update the cost of your jar on your product cost sheet here, your formulas automatically adjust on your actual individual product cost sheets, and that works across the board. So again, you have your product cost sheet, which serves as your master sheet, and then your individual items listed on different sheets, identifying your ingredients and the hard goods that go into that. In the case of fermented foods, we've got jars, lids, gloves, pH test strips, beard nets, the cost of the scale that we use to weigh everything out, the buckets that we use to ferment them in, or the crocs, the followers, the springs, the lids. One thing I could probably put in here is the airlock, and I'll just type that here for future reference. And these are things that um, you know, I forgot about, and I'm continually adding. And in products more complex products like kimchi, for example, you're going to use more rubber gloves than you would in a more simple batch of something like traditional sauerkraut, which is simply cabbage, salt, mixed, and thy. Whereas there's a whole process that goes into kimchi where you chop the, you know, in addition to just simply chopping the cabbage and mixing it with salt and then letting it sit, you chop the knap of cabbage, you put it in a bucket, you mix a salt, brine, you let it soak, you drain the cabbage, you chop your other ingredients, then you mix together in a paste, and then you you know, it's a multi-step, more complex process, which requires more gloves and more uses of all of these other things like beard nuts. So um it's important to take all of these things into consideration when you do this. So we've got you know different batches of kimchi being costed out, bread and butter pickles, garlic dill pickles. We we for for everything that we do, we have created a spreadsheet identifying the costs. And what's important is that first and foremost, we do this, okay? Because you may have an idea that you want to do something, uh for example maybe we want to make a uh a ferment with fresh star fruit and jujubies or something. I I don't know. I'm I'm saying that because it it would be uh di difficult to, or dragon fruit or something like that, it would be very difficult to obtain. And I in the moreover, I don't even know how that would ferment, so it's it's a great example. But in order to do that, maybe the processing costs after obtaining the product in the first place would be supremely cost prohibitive, and you know, maybe the market isn't there, and but it's just not really a wise idea to move forward with that ferment. And if you're doing baked goods or providing a service, you know, maybe you can determine that a particular location is not optimal, or a particular product is not optimal, or if you're dead set on using a particular product or ingredient in the product that you're trying to make, you can better understand what it actually is going to take for you to make a profit on this should you decide to start selling this stuff at market. So, guys, if you want to learn more about you know this spreadsheet and everything that we are doing here on the homestead, then I would encourage you to join the group over on Telegram at t.me slash all around growth, because like I said, I am more than happy to share this document with anyone who wishes to obtain it over there. I'll simply remove my data, but I'll leave the formulas there for you so that you can see how it works, see how I've put everything together. And hey, even if you just want to take a look and do some QA on it as well, I'm more than happy to have you do that as well. So, you know, t.me slash all around growth is where you can connect with us and talk about this in depth more, and uh also learn about how you can participate in the live stream coming up later this week, which is going to be on Friday, the day after Thanksgiving. And on Friday, we are going to do a live stream where I will be talking about all of the things that I am grateful for in all aspects of life. And I'm just gonna do some free talk about some of the things that I'm grateful for with regard to you know the financial part of my life, the physical part of my life, with regard to personal development, my family, my spiritual life, my social life, and my career and how that has changed and uh evolved, especially over the past six months since leaving my job. So if you want to call in and talk a little bit about some of the things that you are grateful for in your life, you can learn how to do that again in the Telegram group. Uh members of the audience that are engaging there will have links and access to call in. I may post something on the Facebook group as well. I'm not really sure, but I'm really encouraging people to engage in Telegram because that is where the healthy dialogue is at. And uh you can participate in that as well at t.me slash all around growth. So live stream coming up on Friday. On Thursday, we are going to do a Thanksgiving Day special. And because we are actually doing Thanksgiving Day on Saturday as a family here on the homestead, in order so that the siblings can do traditional Thanksgiving on Thanksgiving Day with their spouses and their families. We we just we don't particularly care. Uh, we just want to spend time with everyone. So we're gonna do Thanksgiving on Saturday. So we'll do a Thanksgiving Day special on Thanksgiving Day. Uh Wednesday, we're gonna do a check-in on our goals with a personal development uh special. And uh tomorrow on Tuesday, we're gonna do an episode on something physical, and I'm going to talk about an easy way to be introduced to Tai Chi and Qi Gung. And if you're not familiar with what those are, Tai Chi and Qi Gung both promote healing, stress relief, and energy flow using a gentle using a series of gentle flowing movements and breathing techniques. These movements allow you to revitalize your body by releasing tension and anxiety while recharging with fresh energy. So if you're interested in learning more about Tai Chi and Qigong, then tune in tomorrow as we talk about a program called Five Day Fit Chi. So, with that, guys, that route just about wraps up today's show. I am grateful for you tuning in. And like I said, check out show notes for everything that was discussed in today's episode. And I look forward to seeing you tomorrow as we talk about Tai Chi and Chi Gung.

SPEAKER_01 31:03

This is Rob Kaiser, and I'm not sure.