In one season he earns a good harvest and profits, and in the next season his crops fail.
But for both years he has to pay the same rental charges for the building.Ī farmer purchased a field for agriculture on loan. One year his school got 1000 admission and the other year he got only 100 new admissions. He has to rent a big building for the purpose. Producers have to pay fixed costs for it even when there is zero production or no profits.
These costs don’t depend on the amount of production. Fixed costs as the name shows remain fixed throughout the time. The major types of the cost of production are as follows:įixed costs include those prices which don't change with time. Production costs or cost price can be of different types. What are the types of cost of production ? It helps the government to decide the price ceiling and price floor, and also the minimum support price of a product. It helps the manufacturer to set the maximum retail price of his products. It helps in estimating the net profit or net loss on the product sales. What is the importance of the cost of production ?Ĭost of production is an important term of economy, because of the following reasons: Total cost of production= Cost of labor Cost of raw materials ie Overhead costs on manufacturing. Here is the formula of calculating cost of production. How can the cost of production be calculated ?Ĭost of production or cost price or production costs can be calculated by adding all direct and indirect costs of a manufacturing unit. These examples have cleared the meaning of cost of production in your mind. The cost of production for 1000 cups here is 4200 INR.
Now, the total cost of production of cups is the total cost of mold, clay, labor, baker, painter, and transportation charges. After that, Henry spends 500 INR on petrol on his motor, for delivering the cups to the market. Later a painter demands 2 INR for painting each cup. The charge of baking is the same as the charge of making. 20 cups require 1 kg of clay, which costs 200 INR.įurther, a labor asks 5 INR for making one cup. He purchased a mold for making cups of 1000 INR. For the first month, he set a target of 1000 cups. Henry wants to set up a cup manufacturing unit. Now, let us consider a big scale example,
#Overhead cost per unit calculator plus#
Here the cost of production of sewing machines for Adi is 5300 INR, i.e., original cost of sewing machine plus the cost of transportation. Sam purchases a sewing machine for 5000 INR, he spends 300 INR on transporting the machine to his home. Here the cost price of shoes is 200 INR plus the labor charges of Ram. Ram is a cobbler, and he makes a pair of shoes by purchasing a piece of leather at 200 INR. Now let us understand the meaning of the cost of the production with few real-life examples: Maintenance cost of equipments and infrastructure usedĮxplanation of cost of production with example The cost of production includes following secondary costs:Ĭost of labor required for the process of manufacturing The cost of production includes various direct and indirect costs that come in between the process of manufacturing. What does the cost of production include ? Or in simple words, the cost of production is the original cost of the product without adding profits of wholesalers, shopkeepers, and other intermediaries. It includes all direct and indirect costs of manufacturing the product. It is the total cost sustained by a business to produce a specific quantity of a product. The Cost of Production is also called production costs or cost price. How is the cost of production of an article determined? What are its types? And why is it different from the manufacturing costs? Read the blog to the end to get your answers with real-life examples. The huge margin between MRP and manufacturing price is further filled with the production costs and profit of the traders. The original manufacturing cost of the product is quite less than the maximum retail price of the product. Whenever you purchase an article from the market, you buy it at the maximum retail price, MRP. Read all the important terms related to the cost of production and also about its importance. Read this blog till the end to learn about the cost of production.
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