Production costs are the costs of acquiring production factors: land, capital, labor. Production costs, which include normal profit, are called economic or imputed. And they are not equivalent to the economic costs that are used in accounting. The profit of the owner of the company is not included in them.
So what does the cost structure look like?
Gross costs - these are the costs that are necessary for the production of a product at a given time. They are variable and constant. The first group is direct expenses. Fixed costs do not depend on how many products are produced and the organization bears them in any case. These include the costs of utility bills, the purchase of buildings, etc.
Direct production costs are costs associated with labor costs, the purchase of basic materials and raw materials, fuel, etc. They directly depend on the output of products. The more production is required, the more raw materials will be needed.
Fixed costs and direct costs are attributable to the cost of production.
The enterprise should clearly identify possible output levels in order to avoid excessively high production costs. To do this, you need to study the dynamics of average costs. If direct costs and fixed costs are attributed to how much production will be produced, then average costs will be obtained.
Average costs can be higher than the market price, equal to it or fall below. The company will be profitable if they are below the market price. When an enterprise compares its production costs in various industries, it receives the sum of opportunity costs. They represent the cost of producing other goods, the release of which the entrepreneur may refuse if he considers that his product can create greater efficiency.
To formulate the strategy of the company, you need to determine additional or marginal costs. They are necessary provided that the company increases the volume of production per unit of goods. If it is assumed that direct costs will be unchanged, then marginal costs are equal to the growth of
variable costs (raw materials,
labor).It is important for a firm to compare marginal costs and average. This helps in managing the organization, determining the optimal production volumes at which the company always makes a profit and is sustainable and profitable.
In modern market conditions, to calculate production efficiency, a comparison of income and costs is assumed. Expenses include salaries, expenses for materials, components, utilities and others. Direct costs can be considered key, as they affect the volume of production.
To reduce costs, it is necessary to carry out some activities: staff development, the use of new equipment and production technologies, the use of new transportation methods, new advertising, and trade.