How do economists treat production costs?

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wordprof eNotes educator| Certified Educator

Production cost is a major category on the accountant’s taxonomy, because at base the CEO must watch the ratio of production cost per item to sale price per item, and that ratio changes from day to day.  Now, production costs are broken down several ways, first by manufacturing costs, then by distribution costs, then by overhead, etc.  Each of these categories is broken down further into such categories as human resources costs (further divided into wages, benefits, etc.), raw material costs, manufacturing process costs (including maintenance cost on equipment, materials needed to sustain operation, etc.), storage costs, transportation costs, etc. etc.  All this data is compiled to determine the production cost, usually but not always broken down into coast per unit (so that it can be compared to price to the wholesaler per unit).  Then there are two ways to keep the “profit margin” at its maximum—adjust the price per unit, or lower the production cost.  By examining all the elements that comprise the production cost, the CEO can take several actions—reduce human resource costs (firing, wage adjustments, etc.), reduce manufacturing costs (speed up assembly line, streamline production methods, etc.),  refine distribution procedures (combine routes, change carriers, etc.).  Production costs, being such a large category, are most flexible; sales promotions, advertising, and the like can increase the volume of revenue but usually by definition decrease the profit margin, at least in the short run.