What Is Cost of Production and Its Types

Imagine you are going to a birthday party as a group of four, and you decide to buy a single present. Hence, each of you puts in some money to buy one, and your friend likes the gift. This pooling of funds is a collaborative effort to buy a gift your friend appreciates. So, consider the total money the four of you put in as the production cost and the gift as the product.

Similarly, in creating unique products that generate revenue, there is a need to gather resources to cover the production costs. 

These costs include various elements such as raw materials, labour, delivery,  and other expenses involved in manufacturing the product. The production cost is the sum of all these elements. It tells you the overall expenses put in for one single product over a specific period, which is required while setting prices. 

It is evident that the role of technology in the current world is an immense one. It also has a huge impact on production costs. The production costs across industries have drastically gone down on some headers due to the induction of technology in sales, production and delivery pipelines.

So, in this chapter, let's explore the concept of production costs and how technology plays a vital role in them.

Production Costs

The cost, or the money required to build or manufacture a product and introduce it to the outside world, is known as the product cost. The cost of the raw materials includes the money paid for a specific material, which is key to your product. These materials are used directly in the manufacturing process. Labour costs are the money given to people who are directly linked to manufacturing; they include the wages and salaries given to the workers. 

While the above-mentioned costs are directly linked to the manufacturing process, this one is the opposite. The process of production also has many things that are indirectly linked to it, including the machinery, its maintenance, etc. These also fall under product costs. Production costs include not just the costs of raw materials, labour and others but also the taxes that the company is expected to pay for the production.  

Just like how we used to submit our assignments to the teachers once they are done, the final product value is calculated and presented to the head of the company for approval, and the product is released into the market. 

The product cost is calculated using a very basic formula where they add up the manufacturing costs, labour costs, and the cost of raw materials to obtain the product cost, which is later used to understand the concept of profit and loss. 

If the production cost of a single product is higher than its price in the market, they can consider the product a grand success, whereas if it is less than the price, they are falling towards loss.

Two Types of Product Costs

• Fixed Costs

Imagine yourself as a homebaker who bakes yummy cakes. As a person who is just starting the business, you will have to buy certain appliances, which will cost you some money even if you have two orders or twenty in a month. This type of cost is termed a fixed cost. 

A type of cost that stays the same throughout its existence. Even if the product goes out of style, its cost will be the same. 

• Variable Costs

As a homebaker who gets three to four orders a day, the money put in to buy flour, sugar, chocolate chips, and all other ingredients will be more than the money used to buy products for making one cake. So, as the number of cakes increases, the money used to buy the ingredients also increases; this type of cost is called variable cost.

Under variable costs, the amount increases as the production increases. Hence, it doesn’t stay the same as fixed costs.

• Marginal Costs

You got an order for a two-layer-cake, and once you have finished the cake, which costs a specific amount, say ₹700. The client asked you to make it a three-layered-cake. In this scenario, you will have to adjust the cost of the ingredients for 1 layer of the cake additionally. So, the amount of money used to make just the third layer of the cake is called the marginal cost.

So, it's the additional cost required to make just one unit of the product.

Are the Firm’s Supply Decisions Affected?

A firm’s supply decisions mainly revolve around the cost of raw materials, labour, and other expenses. When they increase, the supply reduces, and vice-versa. 

Continuing with the example of the cake business, when the money for flour increases, then there is an increase in the expected cost of the cake. When such a situation occurs, you are left with no option but to increase the price of the cake, which ultimately results in reduced orders. Hence, it affects the firm’s business.

It's not just the materials; if you hire someone else to help you out in your business, you will have to pay that person as well, which increases the labour cost, leading to an increase in the product price. 

The same goes with other expenses, such as rent. If you have rented an area and the landlord asks you to increase the rent, it increases the PC (Product Cost), which builds up the PP (Product Price).

Role of Technology in Supply

Alright, let's talk about how cool technology can change the way things are made and sold. Surrounded by technology from the moment we wake up to the moment we sleep, it has become more like a family member right now. Even the older generations are into Android touchscreen mobile phones and the internet. All this has happened just because of one thing, yes, technology.

Technology has made an impact on businesses as well.  Here are some of the benefits of technology:

• Innovative equipment such as blenders saves you time by making your job easier, which means that you can make more cakes in a short period of time, which decreases product costs.
• Online sales and the use of customised applications will attract more orders. In a world where smartphones are popular everywhere, most people have access to the internet. It increases your chances of increasing supply as your products reach their screens, leading to more orders.
• The use of technology in an efficient way will increase your profit. If you are able to get the raw materials at a very cheap rate through an online platform, there you go; you have hit the jackpot, as your profit will shoot up as your supply increases.

Here, we have a graphical representation of how supply, price, and production or quantity, play their roles.

As the graph shows, you can clearly see that as the quantity of products increases with a standard product price, the supply curve gradually hits a high note.

So, technology is like having a bunch of awesome tools that make it easier, faster, and sometimes cheaper to create and sell things. By using all these tools, product costs can be reduced and sales can be increased, leading to a decent profit for your business. The most important factor is that you must know how to use them and be updated. By using technology, you come across many different kinds of products, which makes you want to create something new. When you are getting a standard profit from your business, you step out of your comfort zone to try something new to attract more people so that your business can grow. For example, as a baker, you can make three-tier cakes, or create a new flavour which will attract more customers.

Conclusion

As a person who is running a business, it is very relevant to know the features of production costs and how they work, as well as the relevance of technology and its influence on the supply of your products. As technology gives you lots of opportunities to grab your business and take it to great heights in terms of profit, just do it and fly high because, as it is said, the sky's the limit, my friend!