Production costs are monetary estimates of all the expenses that have been made within the company, for the production of a good. These expenses cover everything related to labor, material costs, as well as all indirect expenses that in some way contribute to the manufacture of a good.
A company to achieve its goals, must obtain from its environment the elements it needs for the production of a good or service, among which are: labor, raw materials, machinery, capital, etc.
Every organization when producing, generates costs. These costs represent the main factor, when making managerial decisions, since if they increase, they can cause a reduction in the profitability of the company, in fact all the decisions made regarding the production of a good are subject to the production costs and the selling price of the same.
Production costs are divided into:
Fixed costs: these are the permanent costs of the company, so their outlay is not subject to the level of production, that is, if the company produces or not, they must still be paid. For example: payments for the rental of premises, wages and salaries, utility bills (electricity, water, telephone, etc.)
Variable costs: are those that can be increased or decreased, depending on the degree of production. For example: raw material, if the sales of a product increase, then much more raw material will be needed to make it, or conversely, if the sales of a product decrease, not much raw material will be needed. The same happens with packaging, since its quantity will obey the quantity of goods manufactured.
Total cost: It is the sum of the fixed and variable costs.
Marginal cost: represents the rate of variation of the total cost, before the increase of one unit produced. For example: if the total cost to produce 50 products is 100 pesos and the total cost to manufacture 51 products is 115 pesos, it means then that the marginal cost is 15 pesos.
