Glamor Economics

Chapter 63

Chapter 9 Section 3 Understand what is the cost of producing a product - production costs

When doing something, we generally weigh its costs and benefits.Running a business is certainly no exception.Under the condition of market economy, product cost is the measure of compensation for production consumption. Enterprises must use product sales income to offset various expenditures in the production process of products in order to determine profitability. Therefore, the control of production costs in enterprises is an extremely important Work.Production cost refers to the various production expenses incurred by the production unit for the production of products or the provision of labor services, that is, the cost incurred by the enterprise for the production of products.Production costs mainly fall into the following categories:

1.Production cost composition

Production cost consists of three parts: direct materials, direct labor and manufacturing overhead.Direct materials refer to the labor objects in the production process, which are processed into semi-finished products or finished products, and their use value becomes another use value; direct labor refers to the human resources consumed in the production process, which can be used The calculation of wages and welfare expenses, etc.; manufacturing costs refer to the facilities such as plants, machines, vehicles and equipment used in the production process, as well as machine materials and auxiliary materials. Part of their consumption is included in the cost through depreciation, and the other part is through Maintenance, fixed expenses, machine material consumption and auxiliary material consumption are included in the cost.

2.Fixed and Variable Costs
The so-called fixed cost refers to the cost that is fixed and unchanged in the short term, also called constant cost.In other words, the cost does not change with the change of output.For example, if you open a fried chicken restaurant, even if you don’t fry a piece of chicken, in the short term, your storefront cannot be rented out, and the equipment cannot be resold. The rent and depreciation of equipment will still have to be paid, not to mention the interest on the loan.However, if the output increases, for example, the business is very good and hundreds of pieces are fried in a day, the cost will still not increase.The average fixed cost will continue to decrease as the output increases.For example, the fixed cost is 6000 yuan per month. If only 100 pieces of chicken are fried, the average fixed cost per piece of chicken is 60 yuan. If 1000 pieces of chicken are fried, the average fixed cost per piece of chicken is 6 yuan. Then the average fixed cost per piece of chicken is 10000 yuan.A fixed cost means that it is spent at the beginning, and once it is spent, it cannot be recovered.

Variable cost refers to the cost that can change with the change of output in the short term. When there is no output, there is no variable cost, and it will increase when the output increases.However, it should be noted that variable cost increases continuously with the increase of output, while average variable cost is different from it.When output starts to increase, average variable cost decreases instead.When a certain output is reached, the average variable cost reaches the minimum; later, when the output increases again, the average variable cost increases again.

When making short-term decisions, there is no need to consider fixed costs or average fixed costs, only variable costs and average variable costs.

3.average cost

Average cost refers to the average cost allocated per unit of product.Assuming that the total cost is TC and the total output is Q, then the average cost AC=TC/Q.

In order to effectively reduce costs, we must analyze the most essential thing among various factors that affect costs, that is, the analysis of average costs.Reducing the average cost has always been the main goal pursued by every enterprise.

[links to related words]

Sunk costs mainly refer to the fixed costs that manufacturers spend on production factors such as machines and workshops.Judging from the degree of intangible loss of fixed production factors, these fixed factors will depreciate due to technological progress or product replacement, resulting in irreparable losses.

Opportunity cost of operation In an enterprise, a certain resource often has multiple uses, that is, there are multiple "opportunities" for use, but no matter what kind of resource, it can only be used in one aspect, and cannot be used in another aspect at the same time.Therefore, in the process of decision analysis, it is necessary to compare the potential benefits that may be obtained by the abandoned program with the potential benefits that may be obtained by the selected program. Only when the potential benefits are obtained, can the economic benefit of the selected plan be considered high, so as to make the correct choice.

(End of this chapter)