Production Cost is the overall fee paid for assets used to fabricate merchandise and create offerings, along with uncooked substances and labour, which is referred to as production expenses. The merchandise creates offerings to consumers.
Types of Production Costs
There are different types of manufacturing costs that a company may incur in the process of manufacturing a product or providing a service. They include:
1. Fixed Production Cost
Fixed costs are costs that do not change with production volume. This means that if production is zero, or if your business reaches maximum capacity, your costs will not change. For example, the restaurant business has to pay monthly, quarterly, or annual rents, regardless of the number of customers it serves.
2. Variable Production Cost
Variable costs are costs that change as production levels change. In other words, it rises as production increases and decreases as production decreases. If the production is zero, there are no variable costs.
3. Total Production Cost
Total costs include both variable and fixed costs. It takes into account all costs incurred during the manufacturing process or service delivery.
4. Average cost
The average cost is the total production cost divided by the number of production units. You can also add up the average variable cost and the average fixed cost. Management uses average costs to price products for maximum revenue or profit.
5. Marginal cost
Marginal cost is the cost of generating one additional output unit. This shows the increase in total cost due to the production of another product unit. Marginal costs are primarily affected by changes in variable costs, as fixed costs are constant regardless of increased production.
How to calculate the cost?
The first step in calculating the costs associated with manufacturing a product is to determine fixed costs. The next step is to determine the variable costs incurred in the manufacturing process. Then add the fixed and variable costs and divide the total cost by the number of items produced to get the average cost per unit.
Average cost per unit-Fixed cost + Variable cost/Total no. of items produced
In order for a company to make a profit, the selling price must be higher than the cost per unit. Therefore, it is very important that the company can accurately assess all costs.