Cost of production

Every company aims to generate profit. Very often, in order to increase profit company applies a strategy of reducing production costs. They are the inevitable phenomenon arising during production, because the production of goods requires an work, effort and resources. Many of the actions associated with a reduction in costs involves technical production processes e.g. (the use of cheaper materials, change of technology). Cost analysis allows to identify where they are generated, calculation how much does it cost to produce a given quantity of goods, and also gives the answer to the question how to reduce production costs?

Unit cost of producing

The total cost of producing one unit of product consists of multiple items, with a total volume of changes in direct proportion to the number of a given type of products produced. These components are called variable costs.

Variable costs are costs that depend on the size of the production, e.g.

• The wages of production workers
• costs of raw materials, materials and semi-finished products
• energy costs, water
• transport costs

Fixed costs does not depend on the volume from the volume of production. Fixed costs include for example.

• costs of land, rental of premises
• wages and insurance of administration staff
• cost of using buildings and equipment
• the cost of credit and some taxes
• depreciation,

Cost analysis

• The analysis of the direct costs. Uses a variety of methods for the analysis of causal link between costs. One of the most popular methods is the method of successive substitution, which involves substitution of specified factor in place of the planned size and calculation of the difference between them. Such calculation determines the impact of cost factor on the level of overall costs.
• The analysis of indirect costs. These costs are varied in nature and therefore any type of these costs requires a separate analytical approach. The fixed costs of indirect responsibility centres form a relationship between plan and execution, those components of the indirect costs are dependent on the size of the production (e.g. as part of the departmental costs). They are analysed in a manner similar to the analysis of the direct costs.

Cost of production — recommended articles

Costs of production — Batch cost — Indirect material — Lot size — Conversion cost — Isoquant — ABC method — Joint product — Absorbed costs

References

• Shepherd, R. W. (2015). Theory of cost and production functions. Princeton University Press.