What is production cost?

What Does production cost Mean

In order to know the meaning of the term production cost, it is necessary, first of all, to discover the etymological origin of the two words that give it its shape:

-Cost, first of all, comes from Latin. Exactly it emanates from the verb "constare", which is synonymous with "square".

-Production, secondly, also has its origin in Latin. In his case, it comes from "productio, productionis" which can be translated as "prolongation". It is the result of the sum of two components: the verb “producere”, which means “carry forward”, and the action suffix “-ion”.

The cost is the economic expenditure that is carried out to buy or maintain a service or a product. The concept of production , for its part, refers to the action of producing (elaborating, manufacturing, originating).
With these ideas clear, we can move forward in defining cost of production . It is the set of expenses that are necessary to produce a service or a good . The cost of production, therefore, is made up of all the investments that a company must make to continue operating and produce what it markets.

A company makes a profit when the revenue it makes is greater than its cost of production. If a shoe manufacturer has a monthly production cost of 200,000 pesos and earns 500,000 pesos in the same period, it will have achieved a gross profit of 300,000 pesos.
On the other hand, if the income is lower than the cost of production, the company will register losses . Returning to the previous example, if the manufacturer maintains the same production cost (200,000 pesos) but achieves an income of just 150,000, he will not have made a profit: on the contrary, he has losses of 50,000 pesos.
Production costs can be fixed costs (which remain stable in the face of changes in the production level) or variable costs (they change as the volume of production changes). The rent of a building or office, labor, raw materials, payment of electricity and taxes are all part of the cost of production of a company.
In addition to everything indicated, we have to establish that within the production costs there are two other clearly differentiated types. We are referring to the following:

-Direct costs, which are those that are linked and related to each item that is produced. An example of these would be the money it costs to buy the raw material with which it is created.

-Indirect costs, which are those that do not have a direct impact on that article. Examples of this type of production costs are both the salaries of the workers in the administrative area of ​​the company to the cost of renting the premises where it is located.
In order to carry out the best control and management of the aforementioned production costs, it is necessary not only to have an adequate planning of them but also to have computer tools, programs, to be able to have the best follow-up of them.

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