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 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 its 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 “to carry forward”, and the action suffix “-ion”.
Cost is the economic expenditure that is carried out to buy or maintain a service or product. The concept of production , for its part, refers to the action of producing (elaborate, manufacture, originate).
With these ideas clear, we can move forward in defining production cost . This is the set of expenses that are necessary to produce a service or 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 earns is greater than its cost of production. If a footwear manufacturer has a monthly production cost of 200,000 pesos and achieves income of 500,0000 in the same period, it will have achieved a gross profit of 300,000 pesos.
On the other hand, if the income is less than the cost of production, the company will record losses . Returning to the previous example, if the manufacturer maintains the same production cost (200,000 pesos) but achieves income of only 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 due to changes in the production level) or variable costs (they change as the production volume changes). The rent of a building or office, labor, raw materials, payment for electricity and taxes are part of the production cost of a company.
In addition to everything indicated, we have to establish that within 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 materials with which it is created.
-Indirect costs, which are those that do not directly impact that item. Examples of this type of production costs are both the salaries of the workers in the administrative area of the company and the cost of renting the premises where the company is located.
In order to carry out the best control and management of the aforementioned production costs, it is necessary to not only have adequate planning for them but also have computer tools and programs to be able to have the best monitoring of them.