Cost of Production

Cost of Production

    Felicia Holder
    October 5, 2015

      Peter Oburu

Outline the key points that one has to consider when reviewing the cost of production facing a company.

The company must decide the output (product or service) that will be produced. This is called output. Output is defined as the quantity of goods or services produced in a given period, by a firm or industry.
Total fixed cost- A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that have to be paid by a company, independent of any business activity. Examples of total fixed cost include rent, wages, or insurance.  
Total variable cost- Variable costs are expenses that fluctuate proportionally with the quantity of output. Variable costs are directly tied to the activities of producing volume, which rises when these activities increase and falls when activities decrease. Examples of variable costs are direct materials, piece rate labor, and commissions.
Total cost refers to the total expense incurred in reaching a particular level of output; if such total cost is divided by the quantity produced, average or unit cost is obtained.

The fact that cost of production varies with output is overlooked, as such people speak of the cost of production of a good as though it is only one cost, irrespective of the amount or good produced. In some industries for example motor vehicle industry costs fall when a substantial increase in output takes place, while in out industries like agricultural industries costs rise when output is increased.

In the above example, output surplus or shortages can be impacted due to the seasonally of the products. Agricultural industries costs increase due to the amount of time these items are available and the shelf life of the products. The labor for producing and getting the product to market is upfront and will be recoup during the season of the product. Another factor that...