Certified Supply Chain Professional (CSCP) Practice Exam

What constitutes production cost?

1. Cost per unit of materials only

2. Sum of all indirect costs involved

3. Cost per unit of direct materials, labor, and overhead

4. Overhead costs alone

The correct answer is: Cost per unit of direct materials, labor, and overhead

The definition of production cost includes all the expenses that are incurred to create a product. This encompasses a variety of elements, namely direct materials, direct labor, and manufacturing overhead. Direct materials are the raw materials that are directly traceable to the finished product. Direct labor represents the labor costs of those who are directly involved in the manufacturing process, such as assembly line workers. Manufacturing overhead includes all the indirect costs that are necessary for production but cannot be directly attributed to a specific product, such as utilities, rent for the production facility, and salaries of the manufacturing supervisors. By incorporating all of these elements, option C accurately reflects the comprehensive nature of production costs in a manufacturing context. This holistic approach ensures that all expenses related to the production process are accounted for, enabling a more accurate assessment of the cost to produce goods.