Nature of Cost and Cost Techniques

Read Complete Research Material





It is fundamentally essential to first comprehend as to what is a production cost. Production cost is the cost that is incurred in the manufacturing of goods ore production of services. Costs of production include raw material costs and labour costs. In order to deduce the cost of production per unit of any good or service, the cost of production is divided by the number of units that are produced. A company that is aware of how much cost need to be incurred in the production of an item or provision of a service; will be able to appropriately price the good or a service. It would also be in a better position to ascertain the total cost that will be incurred by a business.

Part A) Nature of costs and technique methods-Case Study

Nature of cost and cost techniques

Businesses that are aware of their costs of production would also be better informed with regards to their total expenditure costs to the line of production, or how much costs would be incurred in the entire production process. If the costs are unfavourably high, measures can be taken for their imminent reduction or elimination (p.12). Production costs can be applied in the comparison of the expenditures of various activities of the company. For instance, in production of any good or service there are direct and indirect costs. Direct costs are those costs that are directly related to the production of the product or a service. These are the costs that are exclusively and primarily associated with the production (p.8). Indirect costs are those costs that are incurred on a secondary role in the course of production. If the case of technological products is considered such as cellular phones or computers, the direct costs associated with their production are the cost of raw materials such as plastic or metal. It would also include the labour costs that are incurred in the production of IT products. The indirect costs would include items such as rent, utility expenses and salaries.

It is of paramount importance that a business clearly classifies the costs of production into direct and indirect costs. It is the strategy of every business to produce at optimum level with minimum possible costs. The costs can only be minimised if the business is aware of its cost structure and classification (p.9). For example a business cannot compromise its direct costs in a bid to lower the total cost of production, as this will lead to lower levels of production. Hence, the indirect costs can be focussed for cost reduction purposes. An effective management would always strive to keep the cost at their lowest without compromising on the quality of the products. The costs of production are of two types. These are the fixed costs and variable costs.

Fixed Costs

Fixed costs are those that will remain consistent and fixed regardless of the production level (p.12). The reason is that the costs have no relevant affect on production. Instances of fixed cost in the context of a ...
Related Ads