POLITEHNICA UNIVERSITY OF TIMISOARA
FACULTY OF ELECTRONICS AND TELECOMMUNICATIONS
COST OF PRODUCTION
IORDAN ELVIS CRISTIAN
2nd YEAR, GROUP 1.1
Cost is a sacrifice of resources to obtain a benefit or any other resource. For example in production of a car, we sacrifice material, electricity, the value of machine's life (depreciation), and labor wages etc. Thus these are our costs. Costs are usually classified as follows: * Product cost(cost of production)
* Period cost
In this paper, we will analyze the cost of production with all what it involves. For the beginning, it is necessary to know that the cost of production is classified into: - Direct materials: Represents the cost of the materials that can be identified directly with the product at reasonable cost. For example, cost of paper in newspaper printing. - Direct labor: Represents the cost of the labor time spent on that product, for example cost of the time spent by a petroleum engineer on an oil rig, etc. - Manufacturing overhead: Represents all production costs except those for direct labor and direct materials, for example the cost of an accountant's time in an organization, depreciation on equipment, electricity, fuel, etc.
The product costs that can be specifically identified with each unit of a product are called direct product costs. Whereas those which cannot be traced to a specific unit are indirect product costs. Thus direct material cost and direct labor cost are direct product costs whereas manufacturing overhead cost is indirect product cost.
Costs of production may also be fixed or variable. 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. 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...
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