Meaning of Cost of Production
Cost is the economic expense incurred to purchase or maintain a service or product. The concept of production , however, refers to the action of producing (elaborating, manufacturing).
With these clear ideas, we can move forward in defining the cost of production . It is the set of expenses necessary to produce a service or a good.
The cost of production , therefore, is made up of all the investments that a company must make to continue operating and producing what it sells.
How to calculate the unit cost of production?
The unit cost of production is the sum of the direct costs used in the production of a single product.
In order for this value to be as accurate as possible, you need to consider all types of costs involved (including fixed, variable, etc.).
However, if we were to use all these values, we would not be able to really measure the effectiveness of the production operation in the companies. Also, by knowing the cost of producing a specific product, the company will be better able to determine the selling price of that product.
Therefore, the cost of production per unit of product only takes into account the costs used directly in the production of the product, such as raw materials, rental of machinery for production, etc.
See the formula:
Unit production cost = raw materials + direct labor + direct production costs
A business records profit when the revenue earned is greater than the cost of production . If a shoe manufacturer has a monthly production cost of 46,000 and achieves a revenue of 120,000 in the same period, he will have a gross profit of 68,000.
On the other hand, if the revenue is less than the cost of production , the company will record a loss.
Taking the previous example again, if the manufacturer maintains the same production cost (46,000), but achieves a revenue of only 34,000, he will not make a profit: instead, he will have a loss of 12,000.
Production costs can be fixed costs (they remain stable with changes in the level of production) or variable costs (they change as the volume of production changes). The rent of a building or office, labor, raw materials, payment of electricity and taxes are part of the cost of production of a company.