Today we will talk about one of the most important concepts of economic theory, without a proper understanding of which no professional economist can work: the topic of this article will be production costs and production costs. These two concepts are closely related, because costs are the basis for the formation of production costs.
To begin with, let's understand the concepts:
Production costs - this is all the costs that are associated with the production of products at the enterprise, and which must be covered to make a profit. Depending on the approach to accounting, production costs may also include administrative costs, distribution costs , financial costs and others. However, classical economic theory considers production costs as the aggregate of all costs that are necessary to ensure the production process.
Cost is the sum of the costs that an enterprise must incur to produce a unit of output. From the two definitions above, it is clear that production costs and production costs are inextricably linked, and production costs are simply costs per unit of output.
It is also worth considering the types of costs that are considered in economic analysis. Some believe that such a classification of costs cannot be applied to real enterprises. Although this model is largely abstract, it still shows some important aspects that any company sooner or later faces.
Fixed costs - these are the costs that the company incurs regardless of how many products it produces. These include the costs of maintaining premises, remuneration of employees with a fixed rate, depreciation of fixed assets and others.
Variable production costs are costs, the value of which is associated with the volume of output of the enterprise. Variable costs include the cost of raw materials necessary for the manufacture of finished products, the remuneration of employees with a piece-rate payment scheme, the cost of electricity by machines and so on.
Marginal cost is the sum of the increase in costs that arises from the production of an additional unit of output. This indicator is especially important because its comparison with the marginal revenue indicator (the revenue that the company will receive for the sold additional unit of production) gives an important indicator of the profitability of additional production, on the basis of which a decision is made to expand production volumes.
Costs of production and cost of production are widely used in the analysis of profitability and payback of the enterprise. However, you should not think that the company is only profitable to work if it makes a profit. We must not forget about fixed costs, which will need to be covered even if the volume of production is zero. Therefore, it is necessary to analyze production costs and production costs carefully, taking into account all possible factors that may affect the economic condition of the enterprise. However, in the general case, you can always apply this rule: the lower the cost of production and the cost of production and the higher the market price of the products sold, the higher the profit will be received by the owner of the enterprise, and therefore, the more efficient it is.
We hope that this article has helped you understand the most important economic concepts. Of course, we gave general information on the subject of “Cost of production and production costs,” however, it will be enough to conduct a simple economic analysis.