FACULTY OF BUSINESS

ACCOUNTING SCHOOL

ACADEMIC REPORT
"Production costs"

COURSE:
“Business laboratory”

AUTHOR:
Machacuay Sánchez, Reyna Nicol

TEACHER:
Gallardo Zapata, Jorge Edmundo

Piura - Peru
(2024)
 INDEX

INDEX ............................................................................................................... 2

1 INTRODUCTION ........................................................................................ 1

2 DEVELOPMENT ........................................................................................ 3

2.1 Costs and Expenses .......................................................................... 3

2.1.1 Costs ............................................................................................. 3

2.1.2 Expenses ...................................................................................... 4

2.2 Production Costs ............................................................................... 5

2.2.1 Unit Production Costs .................................................................... 6

2.3 Elements of Production Cost ............................................................ 6

2.3.1 Direct Raw Material (DPM) ............................................................ 6

2.3.2 Direct Labor (MOD) ....................................................................... 7

2.3.3 Indirect Manufacturing Costs (CIF) ................................................ 7

2.4 Production Cost Classification ......................................................... 7

2.4.1 A priori costs .................................................................................. 7

2.4.2 Post-hoc costs ............................................................................... 8

3 BIBLIOGRAPHICAL REFERENCES ......................................................... 9

Production costs are a fundamental aspect in business management and the

economy in general. They refer to the expenses a company incurs to

manufacture goods or provide services. These costs can include a wide

variety of items, such as labor, materials, facility rental, equipment, energy,

marketing, and many others.

Understanding production costs is crucial for companies as they directly affect

profitability and competitiveness in the market. Effective cost management

can help businesses maximize profits and remain viable in the long term.

Production costs are commonly divided into two main categories: fixed costs

and variable costs. Fixed costs are those that do not vary with the level of

production, such as the rental of facilities or the salaries of administrative

staff. On the other hand, variable costs are those that change in direct

proportion to the level of production, such as raw materials and direct labor.

In addition to fixed and variable costs, there is another important category of

costs: marginal costs. These represent the additional cost of producing an

additional unit of a good or service. Understanding marginal costs is essential

for making decisions about production and pricing.

In today's business environment, understanding production costs is critical to

staying competitive and ensuring long-term profitability. This report focuses

on analyzing in detail the various aspects related to production costs,

identifying the key factors that influence these costs and evaluating their

impact on operational efficiency and profitability.

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From the acquisition of raw materials to the delivery of the final product to the

customer, each stage of the production process involves a series of costs that

must be carefully managed and optimized. In this report, the main

components of production costs will be examined, including the costs of labor,

materials, equipment, energy and other indirect expenses.

Additionally, recent trends in production costs will be analyzed, taking into

account factors such as inflation, changes in raw material prices, and

technological advances that may affect production efficiency and costs.

The ultimate goal of this report is to provide a comprehensive view of

production costs, highlighting areas of opportunity for optimization and

offering practical recommendations to improve cost management and

maximize profitability.

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2 DEVELOPMENT

2.1 Costs and expenses

2.1.1 Costs

The cost, also called cost, is the economic outlay made for the

production of some good or the offer of some service . The cost

includes the purchase of inputs, payment of labor , production

expenses and administrative expenses, among other activities.

There are different types of costs and the way they are

calculated in a company or organization may vary.

2.1.1.1 Variable costs

They are those costs that vary in relation to what is

produced, that is, if production is increased these costs

will be higher and vice versa. Some examples are: the

amount of raw materials used, the packaging and

packaging of the products .

2.1.1.2 Fixed costs

They are those costs that a company has beyond the

production obtained, that is, their value does not vary

depending on what is produced. Fixed costs can only be

stipulated in the short term, since they eventually vary

over time . Some examples are: rent payments and

taxes .

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 2.1.1.3 Semi-variable cost.

They are those costs that can vary depending on what

is produced, but these changes are rather progressive.

2.1.2 Bills

An expense is an expense or, in colloquial terms, an outflow of

money that a company or person pays for the purchase of a

product, good or service. It usually becomes an investment

whether tangible or intangible.

Another way to define expenses is as: “Decreases in the

company's net worth, whether in the form of departures or

decreases in the value of assets, recognition or increases in

liabilities, as long as they are not considered distributions,

monetary or not, to the partners or owners” General Accounting

Plan. Expenses produce double economic circulation, because

at the same time money goes out (expense), a good, a product

or a service is entered.

2.1.2.1 Operational expenses

They are those regular expenses that, although they are

not directly used in the production of a good or service,

are essential to guarantee the normal functioning of a

company. Operating expenses include: salaries, office

supplies, rent, and activities carried out to boost sales

and promote products or services.

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 2.1.2.2 Non-operating expenses

They are contingent expenses, that is, they are not part

of the normal operation of the business and therefore

are not included in your budget. Fines, lawsuits, and the

replacement of obsolete equipment are just a few

examples of the non-operational expenses a company

may face.

2.2 Production costs

According to Bechetti (s/f), he tells us that production costs are

everything you invest to produce your products or services and are

essential for setting your prices. They are costs directly related to all

those activities that you need to do to manufacture them. This involves

everything from raw materials to equipment maintenance and labor, also

known as operating costs.

Knowing the production costs of your business allows you to know how

much money you need to keep it running. In addition, it will help you

calculate the profit margin of your project and the real results of its

operation.

In accounting, production costs or operating costs are the series of

expenses involved in keeping a project, team or company running. They

can come from different areas, be it the purchase of inputs or raw

materials, the payment of energy consumption, the salary of workers or

the maintenance of equipment.

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 2.2.1 Unit Production Costs

Unit Cost is the amount it costs a company to produce a product.

This is acquired by calculating all production costs, such as

Fixed Costs (CF), Variable Costs (CV), and Costs in

Administration and Sales Expenses (GAV). It is the cost that

does not have added percentages of profits, tax costs or any

additional cost other than that of production itself.

The calculation of the Unit Cost must be done for each mass

production of products that were manufactured exactly the

same. That is, if different types of products are produced in an

industry, the calculation must be done for each type of product,

using the same formula.

2.3 Production Cost Elements

2.3.1 Direct Raw Material (DPM)

They are the materials that are used in the production of a

product. They are those raw materials that will be transformed

during the production process to give rise to the final product.

They are part of variable costs: the more units produced, the

more material used.

If we take a jam factory as an example, the raw material costs

would include both the ingredients (fruit, sugar...), as well as the

packaging and its labels.

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 2.3.2 Direct Labor (MOD)

It corresponds to the set of expenses that human capital entails.

On the one hand, we find variable labor costs (the more

production, the more staff are needed) and indirect costs

(personnel that do not directly depend on the quantity produced,

for example, a director or a quality manager). .

2.3.3 Indirect Manufacturing Costs (CIF)

These costs are essential for the production process, although

they are not identified with the product. A typical example is the

price of factory rent: it is an expense that cannot be directly

attributed to the cost of production.

In addition to the indirect labor that we have seen previously,

items such as indirect materials such as oils for the machines,

maintenance of the machinery, rental of the premises, taxes,

insurance, energy expenses are included.

2.4 Production Cost Classification

2.4.1 A priori costs

A priori costs are production costs that arise before the operation

itself begins. This means that they are costs that the company

must pay to start manufacturing the product, but they are not

directly related to the quantity produced.

A priori costs may include investments in equipment, raw

materials, labor, and other production-related costs that

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 generate debt. Additionally, they may also include marketing and

advertising costs to promote the product before launch.

2.4.2 Post-hoc costs

Ex post costs are costs that arise after the production of the good

or service. These are costs derived from distribution, marketing

and marketing.

Since they arise after production, ex post costs cannot be

considered production costs. In general, they represent an

important part of companies' expenses.

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3 BIBLIOGRAPHIC REFERENCES
Conceptos.com(s/f). Cost. Retrieved from: https://co n cepto.de/costo/

Bechetti, A. (s/f). What are production costs, how to calculate them and

examples. Recovered from: https: /

/www.tiendanube.com/mx/blog/costos-de-produccion-ejemplos/

Conceptos.com(s/f). Production cost. Retrieved from: htt p

s://concepto.de/costos-de-produccion/

By Evidence Team. ( 2021). What is the unit cost of production. Retrieved

from : https://evidencetec.com/recursos/knowledge/que-es-el-costo-

unitario-de-produccion

European Postgraduate Institute. (2020). What are the elements of

production cost? . Retrieved from: https://www . iep-

edu.com.co/elementos-costo-de-produccion/

TOTVS LATAM (2023). What are production costs, how to calculate them

and how to reduce them? Recovered from:

https://es.totvs.com/blog/gestion-industrial/que-son-los-costos-de-

produccion-como-calcula r los-y-como-revertirlos/