Production is the lifeblood of any business, and this is no different for industries. Regardless of the size of the company, it is necessary to know the production costs to ensure that profits are maintained and eventually increased.
This is an extremely important factor for the commercial manager to keep his operations financially healthy, without harming anyone involved or affecting the quality of deliveries.
In this content, we will explain what the cost of production is, give examples of how to calculate this indicator, and present some measures to reduce it. Stay tuned!
What are production costs?
Production costs refer to all costs related to any productive activity that aims to offer a service or manufacture a product.
These costs can be either fixed or variable, depending on the level of demand, that is, the quantity of products manufactured or services provided.
Among the expenses considered are the cost of raw materials, employee salaries, use and maintenance of machinery, logistics costs, some taxes, among others.
Production costs serve as a basis for the company to determine the final price of its solution, considering indicators such as profitability, contribution margin and break-even point.
Why is it important to know your production costs?
Understanding what the cost of production is is important to have a holistic view of your operation and, basically, the cost per unit of service or product.
This is a simple understanding, since by making a simple relationship belgium whatsapp data between the total cost of production and the number of units produced, it is possible to obtain the unit cost.
The value obtained serves as a basis for setting the price of your products, as well as for understanding the efficiency of your production and purchasing planning.
Furthermore, when we talk about production costs, it is basically a determining factor for the financial health of the organization.
After all, a high cost of production mitigates your profit potential and reduces your profit margins.
And mind you, it's not about offering a cheaper product.
On the contrary, with a high production cost, your company will need to “cut the meat”, either with a lower profit or by offering a more expensive product to your consumer.
Likewise, if the costs of a service are too high, the company would be forced to discontinue the service or find a way to make it cheaper, which affects the overall quality.
Additionally, understanding total production costs enables managers and business leaders to improve their financial planning.
In this way, it is possible to optimize the division of resources so that the company operates sustainably.
And of course, one cannot forget the analytical potential behind this indicator, as it allows managers to understand how resources are allocated and what areas need improvement.
Costs, expenses and expenditures: what is the difference?
Costs, expenses, and expenditures are terms that are sometimes used interchangeably, but there are significant differences between them. How about understanding more? We explain the meanings below:
Costs
Production costs include all expenses necessary to manufacture a product or provide a service, from the cost of raw materials to the cost of labor.
They are divided into fixed and variable.
Fixed values are those that have little or no variation, regardless of production volume.
An example is the lease of the factory site or the Internet bill.
Variables are those that vary according to demand, such as costs with raw materials, electricity, water bills, packaging, among others.
Bills
Expenses are all costs incurred to keep a business running, but administrative, that is, not directly related to production.
An example is investments in marketing actions, in the sales team or in the financial team.
Spent
Expenses, on the other hand, refer to everything that was not included in the budget, but is still important for the business.
A classic example is the costs arising from corrective maintenance of machines, the replacement of broken equipment or the sudden replenishment of items in stock.