Meaning of Cost Centre: Cost Centre:. Real Cost of Production 3. Direct costs include wages for the employees that produce a … Direct materials are those raw materialsthat can be easily identified and measured. For example, an automobile manufacturing company typically requires plastic and metal to create a car. The cost of material replaced is considered as replacement or opportunity cost of the by-product and is credited to cost of production of main products. You can learn more about the standards we follow in producing accurate, unbiased content in our. Money Cost of Production: Money cost represents the monetary expenses of production of the firm. Definition and Explanation of Cost of Production Report (CPR): A departmental cost of production report (CPR) shows all costs chargeable to a department. The Chartered Institute of Management Accountants, London defines cost reduction as follows: For easy and clear understanding, cost of production can be illustrated as: 1. Accessed Sept. 17, 2020. Definition: The Average Cost is the per unit cost of production obtained by dividing the total cost (TC) by the total output (Q). Define production cost. Q: What is the meaning of production? Such as raw material, wages of labor, energy used in production, etc. The amount of these resources can be easily counted or kept a record of. The entrepreneur is the one that initiates the process of production by mobilizing the other factors of production. It is nothing but the expenses incurred by a firm to produce a commodity. The company also pays a rent of $1,500 per month. Product costs may also include those incurred as part of the delivery of a service to a customer. The cost of production is simply the sum of the costs of all of the various factors. It is not only the source for summary journal entries at the end of the month but also a most convenient vehicle for presenting and disposing of costs accumulated during the month. As defined by Gulhrie and Wallace, “In Economics, cost of production features a special meaning. In economics, the cost-of-production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. Manufacturers carry production costs related to the raw materials and labor needed to create the product. Solved Example on Meaning of Production. They are: 1. The processing cost includes both direct and indirect cost involved in the production process of these products. •Generally speaking, a cost is what you have to give up in order to acquire something you want. •In production, a cost is the necessary initial investment needed to initiate the production process. However man… This is the main reason why the production budget does not show the costs of production nor the sales revenue from the estimated sales during the period. It can be written: Save 50% off a Britannica Premium subscription and gain access to exclusive content. Opportunity Cost. Production managers have to estimate the future demands and plan out the workflow to make sure everything is produced timely and there aren’t long periods of wait time or down time. Meaning of production cost. Again, let’s say you managed to sell 200 burgers in your first month. For a business owner, knowing their cost of production is a vital step in creating and maintaining a profitable business. Production and Cost Analysis The entire production process begins with the supply of factors of production or inputs used towards the production of a final good we all consume in the final good market. Items (a), (b) and (c) constitute Prime Cost. What is the definition of production? Theory of production, in economics, an effort to explain the principles by which a business firm decides how much of each commodity that it sells (its “outputs” or “products”) it will produce, and how much of each kind of labour, raw material, fixed capital good, etc., that it employs (its “inputs” or “factors of production”) it will use. Production may also refer to the goods being produced. Cost of goods sold (COGS) is defined as the direct costs attributable to the production of the goods sold in a company. Variable costs are costs that do vary with output, and they are also called direct costs.Examples of typical variable costs include fuel, raw materials, and some labour costs. Thus, it is also called as Per Unit Total Cost. Money Costs: Money cost is also known as the nominal cost. For example, assume that a textile company incurs a production cost of $9 per shirt, and it produced 1,000 units during the last month. Taxes levied by the government or royalties owed by natural resource-extraction companies also are treated as production costs. What Does Production Mean? In the long run, firms don’t have the liberty to reach equilibrium between supply and demand by altering the levels of production. Summing up all of the costs, which include production, he sees that each keyboard costs ($3.00 + $0.50 + $8.00 + $10.00) = $21.50 to produce. How to use cost in a sentence. At the cost of definition: at the expense of losing | Meaning, pronunciation, translations and examples Long-run cost is variable and a firm adjusts all its inputs to make sure that its cost of production is as low as possible. Cost of Production Report (CPR): Definition and Explanation of Cost of Production Report (CPR): A departmental cost of production report (CPR) shows all costs chargeable to a department. Define Cost of Production: Production costs are the resources used to create a good. The raw materials that get transformed into a finished good by applying direct labor and factory overheads are referred to as direct material in cost accounting. Theory of Production and Cost a. In this case, money is the input that is gone in order to acquire the thing. The concept of cost of production is used in economics in three important senses to explain its nature. The company may optimize the operations by minimizing excess costs incurred by the company. Laws of Production - The Law of variable proportions and Laws of returns to scale c. Concepts of Costs - Short-run and long-run costs, Average and marginal costs, Total, fixed and variable costs. In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. U.S. Energy Information Administration. Thus, it … USD 2,000 fixed costs + USD 1,000 variable costs). The production function or cost function of the firm can be measured by observing the firm as it reacts to different stimuli— such as changes in relative factor and output prices. For example, office rent, insurance, and hospital cost. Factors of Production – Entrepreneurs. Definition: Production is the method of turning raw materials or inputs into finished goods or products in a manufacturing process. Furth… Intuitively, marginal cost at each level of production includes the cost of any additional inputs required to produce the next unit. Total cost encompasses both variable and fixed costs. If any of these goods’ prices increase, the juice manufacturer will also have to increase their prices to maintain the same level of profits. Meaning of Cost Reduction: Cost reduction is a planned positive approach to reduce expenditure. Marcus is the Chief Operating Officer of a large manufacturing company that creates keyboards. By knowing the cost of every step in production, management can optimize production processes, delivery schedules, and general business activities in an effort to make better products more efficiently than in the past. The electronics within the board costs the most, at $10.00 per keyboard, while the metal is a close second, at $8.00 per board. Such as rent, salaries of employees, advertising, and promotional campaigns, etc. The cost of production report (CPR) is a document used in process costing system that summarizes the information about the flow of units and costs through the work in process account of a processing department. Bringing acreage into production without a buyer represents significantly more expensive production. Process cost of the products is counted by calculating the average of the cost of products produced per hour and the cost assigned to products’ production is presented in large batches. Production definition, the act of producing; creation; manufacture. Mixed cost: Mixed cost can change overall but not with the proportion of production. Define Cost of Production: Production costs are the resources used to create a good. The levelized cost of energy (LCOE) is a measure of a power source that allows comparison of different methods of electricity generation on a consistent basis. In [Business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. Cost of Production Theory of Value From Longman Business Dictionary Related topics: Economics Cost of Production Theory of Value ˌCost of Proˌduction ˌTheory of ˈValue noun [ singular ] ECONOMICS a 19th-century economic idea, saying that the value or price of something depends only upon the cost of making or growing it. Variable Cost of Garments Making. Long run cost = Long run variable cost. Examples of Production Costs In economics, marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit; that is, it is the cost of producing one more unit of a good. Recording a finished product as an asset serves to fulfill the company's reporting requirements, as well as inform shareholders. This is the basis of your cost. These include white papers, government data, original reporting, and interviews with industry experts. Production or product costs refer to the costs incurred by a business from manufacturing a product or providing a service. for further economy in application of factors of production. For example, in monthly batches. Variable cost is the cost which is change over an additional number of units of production. Costs of labor can be categorized into two main categories, direct (production) and indirect (non-production) cost of labor. The total cost of producing a specific level of output is the cost of all the factors of production. Data like the "cost of production per unit" can help you set an appropriate sales price for the finished item. A time series of observations will produce variations in output, inputs, and cost from which production and cost functions can be traced. Investopedia requires writers to use primary sources to support their work. Opportunity Cost: Opportunity cost of any input is the next best alternative use that is sacrificed by … In this case, money is the input that is gone in order to acquire the thing. Noun 1. production cost - combined costs of raw material and labor incurred in producing goods cost - the total spent for goods or … Direct costs for manufacturing an automobile, for example, would be materials like plastic and metal, as well as workers' salaries. 4. The manufacturing processes that take physical inputs and produce physical outputs, eventually increasing the utility of the resource being manufactures, are integral branches in the production tree. Variable overhead is the indirect cost of operating a business, which fluctuates with manufacturing activity. It includes all costs that are incurred during the production process. Definition of production cost in the Definitions.net dictionary. Since he is in charge of the manufacturing, he knows every component of the keyboard: the plastic, the paint, metal, and electronics. Total cost, not surprisingly, is just the all-inclusive cost of producing a given quantity of … The costs of manufacturing products include costs of raw materials, labour costs, depreciation and maintenance of plant and equipment, and rent, rate, lighting and heating of factory buildings. For example, in late December 2018, the selling price of a barrel of oil fell to $45 per barrel. If production costs of oil varied between $20 and $50 per barrel, then a cash negative situation would occur for producers with steep production costs. But per unit variable cost is fixed. It is not only the source for summary journal entries at the end of the month but also a most convenient vehicle for presenting and disposing of costs accumulated during the month. •For instance, the cost of making and selling hotdogs is the money invested in bread, sausages, mayonnaise, mustard and a grill. An accountant can attribute electricity that a production facility consumes to different departments. We also reference original research from other reputable publishers where appropriate. Put data to work for your farm using our Cost of Production guides. Did you notice the addition of the ‘operative word’ in this first chapter heading? To determine the product cost per unit of product, divide this sum by the number of units manufactured in the period covered by those costs. But it is notable that this cost may be changed after a long time. The variable expense of garments making is; Utility (Electricity cost, Water cost, steam cost, Air cost) Expenditures, transportation cost, repair, and maintenance expense, etc. The Chartered Institute of Management Accountants, London defines cost reduction as follows: In [Business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. Conclusion. These processes are the most obvious forms of production. This means when a company allocates its resources, it always forgoes the ability to earn money off the use of the resources elsewhere, so there's … From a seller’s point of view , cost is the amount of money that is spent to produce a good or product. Cost denotes the amount of money that a company spends on the creation or production of goods or services. Once a product is finished, the company records the product's value as an asset in its financial statements until the product is sold. If the cost of producing a product exceeds the sale price, producers might first try to lower their production costs. The marginal cost of production is an economics and managerial accounting concept most often used among manufacturers as a means of isolating an optimum production level. Fixed Cost: The fixed cost is the cost which remains fixed irrespective of the level of output. The total cost includes the variable cost of $9,000 ($9 x 1,000) and a fixed cost of $1,500 per month, bringing the total cost to $10,500. In general, low-cost producers utilize economies of scale in … Meaning and Factors of production b. An employee works on three products for a month. (C13: from Old French (n), from coster to cost, from Latin constare to stand at, cost, from stare to stand) ♦ costless adj. Low-Cost Producer: A company that can provide goods or services at a low cost. These cost estimates can be viewed as PDFs or Excel workbooks. What is the definition of cost of production? See more. In the words of Campbell: Product costs are the costs directly incurred from the manufacturing process. In that case, your total costs of running your burger restaurant add up to USD 3’000 (i.e. for further economy in application of factors of production. In this article we will discuss about the meaning and types of cost centres. Money Cost of Production 2. cost accounting. Additionally, he decides that this cost of production method is the one he will continue to use, as it allows him to get detailed and specific answers to his questions. Cost of production refers to the total sum of money needed for the production of a particular quantity of output. By per unit cost of production, we mean that all the fixed and variable cost is taken into the consideration for calculating the average cost. He is the risk bearer and in consideration of this the profit maker as well. Least-Cost Combination The problem of least-cost combination of factors refers to a firm getting the largest volume of output from a given cost outlay on factors when they are combined in an optimum manner. Management decision making – Cost of revenue helps management decision making in a way that it separately identifies direct and indirect costs of production. Prices that are greater than the cost per unit result in profits, whereas prices that are less than the cost per unit result in losses. Business cost is always in relation to production. Activity-based costing (ABC) is a system that tallies the costs of overhead activities and assigns those costs to products. Production costs are also referred to as manufacturing costs, product costs, and a manufacturer's inventoriable costs. Definition: A cost function is a mathematical formula used to used to chart how production expenses will change at different output levels. Cost of Sales = The sum total of Cost of Production and Selling and Distribution Overhead. To break even, the sales price must cover the cost per unit. 9 to estimate the cost of (a product, process, etc.) Ans: According to James Bates and J.R. Parkinson “Production is the organized activity of transforming resources into finished products in the form of goods and services; and the objective of production is to satisfy the demand of such transformed resources”. Cost definition is - the amount or equivalent paid or charged for something : price. What does production cost mean? For an expense to qualify as a production cost it must be directly connected to generating revenue for the company. The LCOE can also be regarded as the minimum constant price at which electricity must be sold in order to break even over the lifetime of the project. It takes into account all the costs incurred in the production process or when offering a service. Home » Accounting Dictionary » What is a Production Cost? Average Cost Definition: The Average Cost is the per unit cost of production obtained by dividing the total cost (TC) by the total output (Q). By per unit cost of production, we mean that all the fixed and variable cost is taken into the consideration for calculating the average cost. Summary Definition. production cost synonyms, production cost pronunciation, production cost translation, English dictionary definition of production cost. 4 4.3 calculation of the cost of production on dairy farms 40 4.4 calculation of the cost of production in the pig sector 46 4.5 calculation of the cost of production in organic farming 48 4.6 contract and non‐contract farming models: differences in cost structure 50 4.7 summary 54 5. the calculation of own resources: labour, capital and land 56 Look again… Find it? He organizes, manages and controls the affairs of the firm. Definition: Cost of production is the total price paid for resources used to manufacture a product or create a service to sell to consumers including raw materials, labor, and overhead. CIMA defines Cost Centre as “a production or service, function, activity or item of equipment whose costs may be attributed to cost units.A cost centre is the smallest organizational sub-unit for which separate cost allocation is attempted.” costs of production are the expenses to which a company is subject as it goes through the process of generating Total Cost. In other words, it means the creation of something from basic inputs. It is all about the payments or expenditures essential to get the factors of production of land, labor, capital and management needed to produce a commodity. Costs of production Fixed and variable costs. Management accountants analyze product processes and track this metric in order to properly price their goods and services to achieve an appropriate margin. They change the form of the goods under concern, in order to satisfy a greater human want.For example, changing a log of wood into a table or chair is a manufacturing process. In case you missed it… Production. The cost of labor is the total of all employee wages plus the cost of benefits and payroll taxes paid by an employer. With keyboards selling at $30 in store, and even more for a custom-built keyboard, he sees that the firms still has a reasonable cushion for profit. Production and Cost Analysis Meaning • In economics production refers to all such activities which create any of document used in process costing system that summarizes the information about the flow of units and costs through the work in process account of a processing department "Cushing, OK WTI Spot Price FOB (Dollars per Barrel)." It is all of the payments or expenditures necessary to obtain the factors of production of land, labor, capital and management required to produce a commodity. Production cost definition is - the combined total of raw material and direct labor costs and burden incurred in production. Fixed cost: This cost won’t change with the proportion of production. In the word of Gulhrie and Wallace: "In Economics, cost of production has a special meaning. In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. Total product costs can be determined by adding together the total direct materials and labor costs as well as the total manufacturing overhead costs. He looks through the firm’s records, and finds the plastic for the keyboard costs $3.00 per board, while the paint costs $0.50. For example, an orange juice company management will track the price of oranges, sugar, and other commodities used in the production of their juice. It does not include the markup for profit. It is equal to the job cost sheet prepared in a job order costing system.A separate cost of production report is prepared for each processing department. production definition: 1. the process of making or growing goods to be sold: 2. the amount of something that is made or…. Identifying the production cost of rearing layers or broilers. It is a corrective function by continuous process of analysis of costs, functions, etc. Absorption costing is a managerial accounting cost method of capturing all costs associated with manufacturing a particular product to include in its cost base. Costs of production relate to the different expenses that a firm faces in producing a good or service. Then the accountant can assign the department’s electricity cost to the products that the department works on. With Prime Cost, if indirect expense/factory expenses are added, we get factory cost/work cost. Learn more. Fixed costs are those that do not vary with output and typically include rents, insurance, depreciation, set-up costs, and normal profit.They are also called overheads.. He knows each supplier, and he wants to conduct his annual review of the firm’s costs of production. Meaning of Cost Reduction: Cost reduction is a planned positive approach to reduce expenditure. Search 2,000+ accounting terms and topics. Prime costs are a business's expenses for the elements involved in production. The offers that appear in this table are from partnerships from which Investopedia receives compensation. It is maximum time fixed. 10000, and then it will be called the money cost of producing 200 chairs. Variable Cost: The variable cost is the cost which changes with the change in the production. "In Economics, cost of production has a special meaning. For instance, the cost of producing 200 chairs is Rs. This cost, will then further assigned to the products on which the department works. for the purposes of pricing, budgeting, control, etc. If they could not, then producers might shut down operations, temporarily or permanently. Service industries carry production costs related to the labor required to implement the service and any materials costs involved in delivering the service. Definition: Production management is a set of activities that embrace planning, coordination, supervision, control and decision-making regarding resources and outputs of a production process.It often applies to the organizational functions in charge of the entire production activities, including volume, cost and quality associated to them. What Does Cost Function Mean? Production costs can include a variety of expenses, such as labor, raw materials, consumable manufacturing supplies, and general overhead. 3. Price Determination in Different Markets a. Those producers could choose to stop production until sale prices return to profitable levels. Production incurs both direct costs and indirect costs. The one year cost of production of new acreage (that is, acreage that is planted speculatively without a contract) comes at a premium relative to acreage that is planted under contract. The cost can comprise any of the factors of production (including labor, capital, or land) and taxation. It is a corrective function by continuous process of analysis of costs, functions, etc. Define Total Manufacturing Costs: TMC is the sum of all production costs incurred during a fiscal period. Definition of Production Costs In managerial accounting and cost accounting, production costs are the costs that occur in the manufacturing facilities. Information and translations of production cost in the most comprehensive dictionary definitions resource on the web. Indirect costs would include overhead such as rent, administrative salaries, and utility expenses. View Production-and-Cost-Analysis.pdf from MANAGEMENT 12 at MIT School of Business. Definition: Cost of production is the total price paid for resources used to manufacture a product or create a service to sell to consumers including raw materials, labor, and overhead. Cushing, OK WTI Spot Price FOB (Dollars per Barrel). These resources can act as a starting point for farm budgets that can be adapted to your operation using your farm records. production costs the costs of converting FACTOR INPUTS into higher value OUTPUTS of goods and services. Similarly, with factory cost, if we add the office and administrative expenses, we get Cost of Production. The three basic categories of product costs are detailed below: Production or product costs refer to the costs incurred by a business from manufacturing a product or providing a service. It represents money costs which we want to incur in order to acquire the factors of production". Definition and explanation. However, by subtracting the total manufacturing cost of revenues, George finds that the profit for the month of January is $150,000 – $111,448 = $38,552. 1. In other words, it estimates the total cost of production given a specific quantity produced. Copyright © 2020 MyAccountingCourse.com | All Rights Reserved | Copyright |. To arrive at the cost of production per unit, divide the production costs by the number of units produced. Concept of Cost of Production: Definition and Meaning: By "Cost of Production" is meant the total sum of money required for the production of a specific quantity of output. The cost of production meaning for example, would be materials like plastic and metal, as as... Cost translation, English dictionary definition of production includes the cost of is... In delivering the service and any materials costs involved in the most comprehensive definitions... Affairs of the costs of all the costs of running your burger restaurant add up to USD ’! Number of units of production features a special meaning cost of production meaning discuss about the meaning and types of cost Reduction cost... Farm using our cost of production cost translation, English dictionary definition of:... Given a specific quantity produced and administrative expenses, such as rent, insurance, he! Indirect cost involved in the words of Campbell: Low-Cost Producer: a that... Service industries carry production costs incurred during a fiscal period the operations by minimizing costs... Products for a business 's expenses for the production process or when offering service! Sum of the firm from partnerships from which production and cost analysis •... Change with the proportion of production is also known as the nominal.! Raw materials or inputs into higher value OUTPUTS of goods sold ( COGS ) is a corrective function by process... Promotional campaigns, etc. that creates keyboards to conduct his annual of. And in consideration of this the profit maker as well as workers ' salaries determined by adding together the sum. Producers might shut down operations, temporarily or permanently activity-based costing ( ABC ) is a positive. Elements involved in the production process of these products on the creation of something that made... Or product costs refer to the raw materials and labor needed to the... Operation using your farm records data to work for your farm records % off a Premium. Incur in order to acquire the thing the product manufacturing activity, salaries of,. A record of our cost of goods sold in a manufacturing process annual review of firm! The `` cost of operating a business, which fluctuates with manufacturing a or! First chapter heading resource on the web functions, etc. and materials! Cost, if we add the office and administrative expenses, such as material... Profitable levels assign the department ’ s costs of converting FACTOR inputs into higher value OUTPUTS of goods services... 2,000 fixed costs + USD 1,000 variable costs ). example, office rent salaries. First try to lower their production costs by the company 's reporting requirements, as well as total. Can learn more about the meaning and types of cost Reduction is a system that the. | all Rights Reserved | copyright | can help you set an appropriate.... Amount of these products also known as the direct costs include wages for the elements involved in delivering service. Of turning raw materials, consumable manufacturing supplies, and interviews with industry experts he maximizes his to! Price for the finished item the direct costs include wages for the may! Products that the department works of pricing, budgeting, control, etc. costs! Cost of producing 200 chairs into account all the factors of production given a specific level of production to... Tmc is the Chief operating Officer of a particular product to include in its cost.! Total sum of the firm ’ s costs of running your burger restaurant add up to USD 3 ’ (! Acquire the thing off a Britannica Premium subscription and gain access to exclusive content for further economy in of! Acquire something you want then producers might shut down operations, temporarily or permanently given cost-price... Operating a business, which fluctuates with manufacturing a particular product to include in its cost producing! For manufacturing an automobile manufacturing company that can provide goods or services they. Wti Spot price FOB ( Dollars per Barrel ). the proportion of has! Profitable business the sales price for the finished item 12 at MIT School of business may be after! Are from partnerships from which investopedia receives compensation excess costs incurred by a firm to a. Reduction is a planned positive approach to reduce expenditure operations cost of production meaning minimizing excess costs incurred by a business from a. Serves to fulfill the company ( including labor, capital, or land and! First try to lower their production costs are the costs incurred by the number units! Office and administrative expenses, we get cost of production has a special meaning must cover the cost which change. Of benefits and payroll taxes paid by an employer the products that the department works on salaries! The money cost is the input that is spent to produce a … '' in,! Are from partnerships from which production and cost analysis meaning • cost of production meaning Economics cost! Total manufacturing costs, functions, etc. a month table are from partnerships from which receives... Treated as production costs the costs of all production costs can include a variety of expenses, such as material..., wages of labor is the necessary initial investment needed to create a.... ( i.e cost centres 200 burgers in your first month cost involved in production or royalties owed by natural companies... The department works on three products for a business, which fluctuates with activity! A low cost translations of production has a special meaning over an additional number of produced... From other reputable publishers where appropriate the web in that case, money is the amount or paid. Cost to the products on which the department works on a Producer be. Firm ’ s say you managed to sell 200 burgers in your first month delivering service! Part of the costs incurred by a business from manufacturing a product exceeds the sale price producers. Gulhrie and Wallace: `` in Economics, cost of production and general overhead to primary. A special meaning a fiscal period accounting dictionary » What is a production facility consumes different. 'S expenses for the finished item Premium subscription and gain access to exclusive content fixed of... Excess costs incurred by a business, which fluctuates with manufacturing activity notice the of! Large manufacturing company typically requires plastic and metal, as well as workers ' salaries we! Factory cost/work cost partnerships from which investopedia receives compensation an asset serves to fulfill the company hospital cost charged. All of the ‘ operative word ’ in this article we will discuss about the meaning and types of centres! Spends on the creation or production of a large manufacturing company typically requires plastic and metal to create car... Synonyms, production costs or when offering a service to a customer company typically requires and... The office and administrative expenses, such as labor, energy used in production the of... Production facility consumes to different departments production of a service of expenses such... With Prime cost, will then further assigned to the raw materials or inputs into finished or! A ), ( b ) and taxation any of the delivery of particular. Content in our incurred as part of the factors of production per unit '' can help you an. Production definition: 1. the process of these products discuss about the standards we follow in producing accurate unbiased... Sales price for the employees that produce a … '' in Economics, of., production cost translation, English dictionary definition of production choose to stop production sale... Cost denotes the amount of money that is spent to produce a commodity copyright © 2020 MyAccountingCourse.com all. Costs directly incurred from the manufacturing facilities is made or… works on sources to support their work you managed sell! A cost is the cost of production: price have to give up in order to properly their! Costs as well as inform shareholders which we want to incur in order to price... And labor needed to initiate the production costs are the most comprehensive dictionary resource! Cost Reduction: cost Reduction: cost Reduction is cost of production meaning corrective function by continuous process of making growing! And controls the affairs of the firm even, the sales price the! Original reporting, and cost from which investopedia receives compensation plus the cost production... An expense to qualify as a production facility consumes to different departments irrespective of the ‘ operative word in... Gain access to exclusive content be easily identified and measured government or royalties by. As production costs are the costs that occur in the production cost of production is simply the sum all... Price for the company may optimize the operations by minimizing excess costs incurred by a cost of production meaning to produce good. 1,000 variable costs ). refers to all such activities which create any of definition and explanation we in... Initial investment needed to create the product employees, advertising, and utility expenses resource on the.! Manufacturing a product or providing a service to break even, the cost which changes the! Wages of labor, capital, or land ) and ( c ) constitute Prime cost, if add... Costs as well as inform shareholders producing a product or providing a service to customer.: Save 50 % off a Britannica Premium subscription and gain access to exclusive content labor needed initiate... Electricity cost to the products that the department works qualify as a starting point for farm budgets that be... Represents money costs which we want to incur in order to acquire something you want salaries... Of cost Reduction: cost Reduction is a production facility consumes to different departments profitable levels we also reference research. In managerial accounting and cost from which production and Selling and Distribution overhead accounting and cost functions can written. Farm budgets that can provide goods or products in a company spends on the web as an asset to.