Pre production cost is any cost incurred before actual production takes effect. This term should not be confused with preliminary expenses, although they follow the same pattern. Creating a prototype of a product is one example.
Definition of Pre Production Cost
Pre-production costs are expenses and expenditures incurred before the actual production. According to the ATSWA study pack, pre production cost is a part of development costs relating to making trial production run preliminary to formal production.
Key Explanations of Pre Production Costs
These costs are incurred before actual production. Creating a prototype of an actual product is classified here. A lot of expenses and expenditures are incurred. This includes buying raw materials, employing the services of humans, and money. Putting the 5 M’s to use here leads to a new product. Which are later on commercialized.
These expenses are part of development costs. In our example, prototypes are part of the development cost of a new product or service. After creating a prototype, there is a need to create actual samples, to ensure that the actual product equals the prototype. Therefore, several trials of the products are created.
Pre-production costs are quite different from preliminary expenses. The former deals with expenses before an actual product is made available to the public while the latter involves all costs incurred to start a business. An example of pre-production cost is the cost of creating prototypes and samples. Moreover, an example of preliminary cost is incorporation cost.
Pre-production costs are not included in the cost of production. Why? These expenses are not part of making the actual products. Therefore, they are posted as non-current assets of the balance sheet or directly to profit or loss, if the cost is not material (that is if the amount is not too high).
If it is material, it will be in the statement of financial position. Every year, the total cost will be amortized. For example, if the pre-production cost is 1 million Naira. This can be amortized for 10 years. So, 1,000,000 ÷ 10 years. Therefore, the total cost of 1 million Naira will be reduced by 100,000 Naira every year.
In final words, all activities engaged in preliminary to the actual production process for a new product or service are referred to as pre-production costs. It is a part of the development cost. And can be differentiated from preliminary expenses in some ways. More so, examples of it are the prototype and samples of new product expenses.