Cost of production refers to the total monetary expenses incurred by the producer in the process of transforming inputs into outputs. In short, it refers to total money expenses incurred to produce a particular quantity of output by the producer.
The knowledge of various concepts of costs, cost-output relationship, etc. occupies a prominent place in cost analysis.
Land
Labour
Capital
Entrepreneurship
Raw Material
Packaging
Advertisement etc
Types of Costs
1. Money cost and Real cost - When cost is expressed in terms of money, it is called as money cost. It relates to money outlays by a firm on various factor inputs to produce a commodity.
When cost is expressed in terms of physical or mental efforts put in by a person in the making of a product, it is called as real cost. It refers to the physical, mental or psychological efforts, the exertions, sacrifices, the pains, the discomforts, displeasures and inconveniences which various members of the society have to undergo to produce a commodity
2. Explicit costs and Implicit or Imputed costs - Explicit costs are those costs which are in the nature of contractual payments and are paid by an entrepreneur to the factors of production (excluding himself] in the form of rent, wages, interest and profits, utility expenses, and payments for raw materials, etc.
Implicit or imputed costs are implied costs. They do not take the form of cash outlays and as such do not appear in the books of accounts. They are the earnings of owner-employed resources. For example, the factor inputs owned by the entrepreneur himself like capital that can be utilised by him or can be supplied to others for a contractual sum.
3. Actual costs and Opportunity costs
4. Direct costs and Indirect costs
5. Past and future costs - Past costs are those costs which are spent in the previous periods. On the other hand, future costs are those which are to be spent in the future.
6. Fixed costs and variable costs
7. Marginal and Incremental costs
Marginal cost refers to the cost incurred on the production of another or one more unit. It implies the additional cost incurred to produce an additional unit of output.
Incremental cost on the other hand refers to the costs involved in the production of a batch or group of output. They are the added costs due to a change in the level or nature of business activity. For example, cost involved in the setting up of a new sales depot in another city or, cost involved in the production of 100 extra units.
Determinants of costs
1. Technology Modern technology leads to optimum utilisation of resources, avoidance of all kinds of wastages, saving of time, reduction in production costs and results in higher output. On the other hand, primitive technology would lead to higher production costs
2. Rate of output (degree of utilisation of the plant and machinery) Complete and effective utilisation of all kinds. of plants and equipments would reduce production costs while, under utilisation of existing plants and equipments would lead to higher production costs.
3. Size of Plant and scale of production-Big companies with huge plant and machineries organise production on large scale basis and enjoy economies of scale which reduce the cost per unit.
3. Size of Plant and scale of production - Big companies with huge plant and machineries organise production on large scale basis and enjoy economies of scale which reduce the cost per unit.
4. Prices of factor inputs - Higher market prices of various factor inputs result in higher cost of production and vice- versa.
5. Efficiency of factors of production and the management-
Higher productivity and efficiency of factors of production would lead to lower production costs and vice-versa.
5. Efficiency of factors of production and the management - Higher productivity and efficiency of factors of production would lead to lower production costs and vice-versa.
6. Law of returns - Increasing returns would reduce cost of production and diminishing returns would increase costs