Concept of Cost of Production:
Definition and Meaning:
By "Cost of Production" is
meant the total sum of money required for the production of a
specific quantity of output. In the word of Gulhrie and Wallace:
"In Economics, cost of production
has a special meaning. It is all of the payments or expenditures
necessary to obtain the factors of production of land, labor,
capital and management required to produce a commodity. It
represents money costs which we want to incur in order to
acquire the factors of production".
In the words of Campbell:
"Production costs are those which
must be received by resource owners in order to assume that they
will continue to supply them in a particular time of
production".
Elements of
Cost of Production:
The following elements are included
in the cost of production:
(a) Purchase of raw machinery, (b)
Installation of plant and machinery, (c) Wages of labor, (d)
Rent of Building, (e) Interest on capital, (f) Wear and tear of
the machinery and building, (g) Advertisement expenses, (h)
Insurance charges, (i) Payment of taxes, (j) In the cost of
production, the imputed value of the factor of production owned
by the firm itself is also added, (k) The normal profit of the
entrepreneur is also included In the cost of production.
Normal
Profit:
By normal profit of the entrepreneur
is meant in economics the sum of money which is necessary to
keep an entrepreneur employed in a business. This remuneration
should be equal to the amount which he can earn in some other
alternative occupation. If this alternative return is not met,
he will leave the enterprise and join alternative line of
production.
Types/Classifications of Cost of
Production:
Prof, Mead in his book, "Economic
Analysis and Policy" has classified these costs into three main
sections:
(1) Production Costs:
It includes
material costs, rent cost, wage cost, interest cost and normal
profit of the entrepreneur.
(2) Selling Costs:
It includes
transportation, marketing and selling costs.
(3) Sundry Costs:
It includes other
costs such as insurance charges, payment of taxes and rate,
etc., etc.
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