It is a cost incurred by a company in manufacturing a product or delivering a service. Production costs depend on raw material and labor. To determine the cost of production per unit, the cost of production is divided by the total number of units produced. It is important to know the cost of production to better price an item or a service and to decide its total cost to the company.
Cost of production includes both Fixed and Variable Costs.
● Fixed costs do not change with the level of output. They usually include rents, insurance, depreciation, and set-up costs. Fixed costs are also known as overhead cost.
● Variable costs refer to those costs which vary with the level of output, and are also known as direct costs or avoidable costs. Examples include fuel, raw materials, and labor costs.