Costs Of Production And Their Short Run Influences

This report will provide insight on what your management team should do concerning production costs. We will examine 2 different scenarios and provide our decision as to which makes most sense. In the first scenario, the total fixed cost of the production is 1,000,000. In the second

In the previous chapter, we discussed the economic theory of production. Comprehending production theory (the relationship between inputs and output) is a necessary prerequisite to understanding cost theory (the relationship between production and costs). As we noted in the previous chapter, costs are derived from production activities. As worker productivity increases, for example, unit costs decrease.

Variable costs are expenses directly associated with the product or service e.g. raw materials, components, packaging.

As for cost structures for this industry, the fixed costs are going to consist of machinery and equipment in order to produce the automobiles. These fixed costs also serve as a barrier of entry into the industry; small firms will not be able to afford the fixed costs. For the variable costs, labor, materials, and advertising are going to be the main costs (Investopedia, 2009). These costs also change according to the output produced; whether the companies cut back on production or increase in production. These costs don’t serve so much as a barrier of entry into the industry, but in order to compete in this industry, an entering firm must come up with them on an extremely large scale.

a) Cost of Production: To understand the cost of production we must first understand what two costs are valuable to company along what can make a company gain or lose profit. First we look at Variable cost which “depends on what materials and labor are needed for the company” and in this case it is anchors which can vary with the volume of anchors that is produced (Russell & Taylor, 2011). The fixed costs are “those that do not vary with output and typically in rents, deprecation, insurance,

The Marginal Cost graph intersects the Average Total Cost graph and the Average Variable Cost graphs at their minimum points. As long as the cost of producing one additional unit remains less than average total cost, the average total cost continues to fall. When marginal cost finally exceeds average total cost, average total cost begins to rise in response. The same effect applies to the relationship between marginal cost and average variable cost.

PROBLEM 5-1. Variable and Full Costing: Sales Constant but Production Fluctuates [LO 1, 2, 3, 5] Spencer Electronics produces a wireless home lighting device that allows consumers to turn on home lights from their cars and light a safe path into and through their homes. Information on the first three years of business is as follows: 2011 Units sold Units produced Fixed production costs Variable production costs per unit Selling price per unit 15,000 15,000 $750,000 $ 150 $ 250 2012 15,000 20,000 $750,000 $ 150 $ 250 $220,000 2013 15,000 10,000 $750,000 $ 150 $ 250 $220,000 Total 45,000 45,000

12) Suppose a firm has $1500 in variable costs and $500 in fixed costs when it produces 500

From each total variable cost, we have average variable cost (AVC) = Total variable cost divided by number of outputs

III. Product cost: ABC Company believes that it has an additional 5,000 machine hours available in the current facility before it would need to expand. ABC Company uses machine hours to allocate the fixed factory overhead, and units sold to allocate the fixed sales expenses. Bases on current research, ABC Company expects that it will take twice as long to produce the expansion product as it currently takes to produce its existing product.

All the costs by a company can be broken into two categories, fixed costs and variable costs. Costs that are independent of output are called fixed costs. Fixed costs remain constant throughout the relevant range and are usually considered sunk for the relevant range. Buildings and machinery are included inputs that cannot be adjusted in the short term. They are only fixed in relation to the quantity of production for a certain time period. The cost of all inputs is variable, in the long run.

In determining the fixed costs per unit for the period for absorption costing (not needed for variable costing since the entire fixed cost is expensed as a cost of the month, not a cost of units), you spread the fixed costs across all the units made. Since production was increased substantially, the fixed cost per unit was reduced:

Under the new cost system, two broad sources of costs were identified: manufacturing and SM&A. All costs within these categories were reclassified as either volume driven or order driven. Hence, four cost pools were set up.

Furthermore, the ACC strategy of offering increased variety requires shorter production runs which inherently increases the cost associated with each product and packaging, as idle time due to process changeover would increase between each product production (4.8% of time com-pared with 2% for DJC). The strategy of increased variety and production runs by the ACC would also affect labor in a number of ways. Direct labor costs would go up due to a larger amount of idle time associated with process changeover and the chance of increased problems associated with the

Product costing refers to the process of assigning shared direct and indirect costs to individual products, customers, branches or other cost items. (USAID, 2007) Product costing is also referred to as assigning costs to inventory and production based on the expenses that go into producing or buying inventory. It is an important process for manufacturers that helps improves management information on products and helps managers and the board members to take key decisions about product design, delivery mechanisms, and especially pricing. (Lacoma, 2013)