THE 2 MOST IMPORTANT COST OF PRODUCTION ELEMENTS - CULTURE VOCABULARY - 2025

The elements of production cost are divided into two lines: direct and variable costs (materials and labor) and indirect and fixed costs (taxes, insurance, accounting, rent, distribution costs, among others).

Production costs or operating costs are all those expenses that a company must establish in order to manufacture a product, to keep a team running or to develop any project.

It is immanent to the fiscal year that all production of goods carries costs. For any productive or business project to be successfully concluded, such expenses must be kept as low as possible.

This is the reason why it is so important to study the cost of production elements.

The 2 main elements of production cost

1- Direct and variable costs

Direct and variable costs include everything that is inherent in production, such as raw materials, labor, maintenance and supervision.

materials

It refers to all the raw material that intervenes, directly or indirectly, in the creation or maintenance of a product or project.

To estimate the cost of the raw material, the quantities of units necessary for the production of the product and the prices per unit of these elements must be calculated once they enter the factory.

Workforce

Labor is the cost that is calculated by paying salaries to workers, technicians, supervisors and all human resources personnel whose efforts are directly linked to the production of the product.

To calculate the expense generated by the personnel, the cost is estimated per hour, per year or per contract.

The payment will go hand in hand with the regulations established in each country by the agreements in force in the payment of human resources.

In the case of large companies that use a lot of mechanized machinery that replaces human labor, the costs per workforce can be reduced by as much as 10%.

But in these cases increase the expenses corresponding to the supervision and spare parts in the mechanical maintenance engineering departments.

2- Indirect and fixed costs

The second type of expenses within the production chain are indirect and fixed costs. They are expenses independent of production but increase cost budgets.

This line includes taxes, insurance, accounting, rent, stationery, medical personnel for plant personnel, security and surveillance service, and radio and television advertising.

Also included are participation in trade shows, free sample shipments as a courtesy to prospective buyers, and distribution costs.

Also, some trivial expenses such as business dinners and cafeteria meals for employees.

Although they may seem unrelated to the cost of production, these services and income are essential for the conclusion of business projects.

Depending on the cases, these can register between 1 and 5% of the total annual expenses of a company.

References

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2. Drury, C. (2013). Managment and cost accounting. Hong Kong: ELBS. Retrieved on December 1, 2017 from: books.google.es
3. Orozco, J. Cost accounting. Retrieved on December 1, 2017 from: jotvirtual.ucoz.es
4. Elements of cost and classification. Retrieved on December 1, 2017 from: solocontabilidad.com
5. Production cost. Retrieved on December 1, 2017 from: investopedia.com