Cost Of Production and its types.
Cost Of Production
A firm combines four factors of production land, labor, capital and organization to produce goods and services. They are paid their rewards in the form of rent, wages, interest, and profit.
So the cost of production is the sum of all such cost which a producer has to bear for producing a commodity, such as wages, rent interest and amount paid for raw material, fuel/power charges, transport cost taxes etc.
There are various kind of costs of production which are total cost, average cost, and marginal cost.
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TOTAL COST
Total cost of production is the total reward to the factor of production, which the producer bears on the production of total quantity of output or total cost is the sum of total fixed cost and total variable cost at each level of output.
Total Cost can be divided into two parts: Total Fixed Cost and Total Variable Cost
Total Fixed Cost: Fixed Cost of a firm is that cost which does not vary with the changes in output per period of time. It is also known as supplementary cost or (overhead charges )If a firm producing nothing, it has to bear the fixed cost e.g. the rent of building Salaries of permanent staff, interest on loan.
Total Variable Cost:- It is also called prim cost of production. It is the cost which directly depends upon the level of output. If a firm producing nothing, variable cost will be zero. As production start. Cost on variable item begins. It goes on increasing with the increase in output and vice versa. Variable Cost includes cost of raw material, wages of labor, transport, electricity, taxes etc.
The entrepreneurs are no doubt interested in the total cost but they are equally concerned in knowing the cost per unit of the product it can be derived from, Total Fixed Cost, Total variable Cost & Total Cost by dividing each of them with corresponding output.
Average Cost or Average Total Cost:- It is also called Average Total Cost. It can be obtained by dividing total cost by unit of output. Total Cost of producing 10 chairs are 1000/10 = 100 per chair.
Average Cost :- can be divided in to two parts:- Average fixed Cost & Average Variable Cost
Average Fixed Cost(A.F.C):– A.F.C of production is calculated by dividing Total Fixed Cost by total quantity of output produced. If the Total Fixed Cost of producing 10 chairs is 6000 then the A.F.C is equal to Rs.600. The A.F.C decreases with the increase in no. of units produced. In the beginning, A.F.C is high. As the output of firm increases it decrease, the larger the output, the smaller the A.F.C & vice versa. AFC= TFC/no. of Quantity output.
Average Variable Cost(AVC) is obtained by dividing the Total Variable Cost by total output. e.g. If the total variable cost for producing 100 meters of clothes is Rs.800 the A.V.C will be Rs. 8.00 AVC= TVC/Q 800/100=8 When firm increases its output the A.V.C decreases in the beginning, reaches minimum & then increases. The shape of A.V.C is like U shaped (It shows when output is increase there is fall in A.V.C.)
MARGINAL COST. Marginal Cost(MC) is the change in TC of output on the production of one more unit of output MC=∆TC/∆Q.
|
Quantity
|
TFC
|
TVC
|
TC
|
AFC
|
AVC
|
AC
|
MC
|
|
1
|
60
|
30
|
90
|
60
|
30
|
90
|
–
|
|
2
|
60
|
40
|
100
|
.0
|
20
|
50
|
10
|
|
3
|
60
|
45
|
105
|
20
|
15
|
35
|
5
|
|
4
|
60
|
55
|
115
|
15
|
13.75
|
28.75
|
10
|
|
5
|
60
|
75
|
135
|
12
|
15
|
27
|
20
|
|
6
|
60
|
120
|
180
|
10
|
20
|
30
|
45
|
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Naeem Javid Muhammad Hassani is working as Conservator of Forests in Balochistan Forest & Wildlife Department (BFWD). He is the CEO of Tech Urdu (techurdu.net) Forestrypedia (forestrypedia.com), All Pak Notifications (allpaknotifications.com), Essayspedia, etc & their YouTube Channels). He is an Environmentalist, Blogger, YouTuber, Developer & Vlogger.